Shaping the Corporate Landscape: Towards Corporate Reform and Enterprise Diversity 9781509914302, 9781509914333, 9781509914319

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SHAPING THE CORPORATE LANDSCAPE Currently, there exists a distrust of corporate activity in the continuing aftermath of the financial crisis and with increasing recognition of the threats of climate change and global, as well as national, inequalities. Despite efforts in the arena of corporate governance to address these, we are still beset with corporate scandals and witness companies facing large fines for their environmental and cost-cutting misdemeanours. Recognising that the usual responses to dealing with these corporate problems are not effective, this book asks whether the traditional form of the joint stock corporation itself lies at the heart of these problems. What are the features of the corporate form and how does its current regulation underscore these problems? Identifying such features provides a basis for the discussion to develop towards suggesting more progressive regulatory developments around the corporate form. More fundamentally, this book investigates a diverse range of corporate governance models that are emerging as alternatives to the shareholder corporation, including employee-owned, cooperative and social enterprises. The contributors are leading scholars from various backgrounds including law, management and organisation studies, finance and accounting, as well as experienced professionals and policy makers with expertise in social and cooperative business models and the role of employees in the corporation.

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Shaping the Corporate Landscape Towards Corporate Reform and Enterprise Diversity

Edited by

Nina Boeger and Charlotte Villiers

OXFORD AND PORTLAND, OREGON 2018

Hart Publishing An imprint of Bloomsbury Publishing Plc Hart Publishing Ltd Kemp House Chawley Park Cumnor Hill Oxford OX2 9PH UK

Bloomsbury Publishing Plc 50 Bedford Square London WC1B 3DP UK

www.hartpub.co.uk www.bloomsbury.com Published in North America (US and Canada) by Hart Publishing c/o International Specialized Book Services 920 NE 58th Avenue, Suite 300 Portland, OR 97213-3786 USA www.isbs.com HART PUBLISHING, the Hart/Stag logo, BLOOMSBURY and the Diana logo are trademarks of Bloomsbury Publishing Plc First published 2018 © The editors and contributors severally 2018 The editors and contributors have asserted their right under the Copyright, Designs and Patents Act 1988 to be identified as Authors of this work. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, e­ lectronic or mechanical, including photocopying, recording, or any information storage or retrieval system, without prior permission in writing from the publishers. While every care has been taken to ensure the accuracy of this work, no responsibility for loss or damage occasioned to any person acting or refraining from action as a result of any statement in it can be accepted by the authors, editors or publishers. All UK Government legislation and other public sector information used in the work is Crown Copyright ©. All House of Lords and House of Commons information used in the work is Parliamentary Copyright ©. This information is reused under the terms of the Open Government Licence v3.0 (http://www. nationalarchives.gov.uk/doc/open-government-licence/version/3) except where otherwise stated. All Eur-lex material used in the work is © European Union, http://eur-lex.europa.eu/, 1998–2018. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. ISBN: HB: 978-1-50991-430-2 ePDF: 978-1-50991-431-9 ePub: 978-1-50991-432-6 Library of Congress Cataloging-in-Publication Data Names: Boeger, Nina, editor.  |  Villiers, Charlotte, editor. Title: Shaping the corporate landscape : towards corporate reform and enterprise diversity / edited by Nina Boeger and Charlotte Villiers. Description: Oxford [UK] ; Portland, Oregon : Hart Publishing, 2018.  |  Includes bibliographical references and index. Identifiers: LCCN 2017050355 (print)  |  LCCN 2017051853 (ebook)  |  ISBN 9781509914326 (Epub)  |  ISBN 9781509914302 (hardback : alk. paper) Subjects: LCSH: Corporate governance—Law and legislation—Great Britain.  |  Corporation law—Great Britain.  |  Stockholders—Legal status, laws, etc.—Great Britain.  |  Social responsibility of business—Law and legislation—Great Britain.  |  Great Britain. Companies Act 2006. Classification: LCC KD2079 (ebook)  |  LCC KD2079 .S525 2018 (print)  |  DDC 346.41/066—dc23 LC record available at https://lccn.loc.gov/2017050355 Typeset by Compuscript Ltd, Shannon To find out more about our authors and books visit www.hartpublishing.co.uk. Here you will find extracts, author information, details of forthcoming events and the option to sign up for our newsletters.

PREFACE

The contributions in this book span a wide range of topics and issues related to corporations and corporate behaviour. Several chapters include critical a­ ppraisals of the prevailing shareholder primacy norm and the consequences of corporate malfeasance, as well as various specific proposals for reforming the corporate law and governance. Other contributions consider the existence and emergence of alternative forms of the business enterprise, including social enterprises, cooperatives and solidarity-based corporate models as possibilities of developing a more diverse and sustainable corporate landscape. Each individual chapter offers readers insight into the development of critical corporate governance scholarship and its possibilities. However, in compiling these contributions into one single volume, our specific aim has been to highlight how the combined impact of these contributions amounts to more than the sum of its parts. This volume is concerned with highlighting the relevance of multi-disciplinary critical scholarship that challenges the structural foundations of the corporate form from a variety of perspectives, and its resonance in both policy and practice. We aim to give readers a sense of the variety of the individual contributions in this debate on the evolving corporate landscape, but at the same time emphasise the sense of urgency that runs as a common theme through these various ­contributions: there is real concern that ‘business as usual’ is not a sustainable option for corporate governance today. As a way of making these features apparent, and mapping out the individual contributions to this debate, we have included a short summary of each of the substantive chapters in this volume on the following pages.

Chapter 1: Corporate Schizophrenia: The Institutional Origins of Corporate Social Irresponsibility Paddy Ireland In recent years, shareholder-value ideology has receded without any noticeable impact on corporate behaviour. Indeed, placing too much emphasis on its baleful effects risks causing us to overlook the more deeply rooted institutional foundations of corporate irresponsibility. This paper explores these foundations. The potential for irresponsibility, it argues, is inscribed in the corporate legal form as currently constituted and

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thus in the property rights structures of contemporary capitalism. Paradoxically, it suggests, so too is the possibility of more ‘socialized’ corporations. While, therefore, experimentation with alternative organizational forms is vitally important to social transformation, with so many key productive resources under the direct or indirect control of corporations, so too is radical reform of the corporate legal form.

Chapter 2: Destruction by Ideological Pretence: The Case of Shareholder Primacy Gordon Pearson The world is facing many problems which can be abstractly summarised in the word sustainability. Technologies, knowledge and understanding, initiated by business, present the possibility of resolving all these problems. However, the dominant ­economic ideology is directing business on a collision course with their resolution. That ideology, based on the simplistic idea of self-interest maximising humanity, holds that free markets with open access, minimised regulation and taxation, will provide best allocation of resources for the economy as a whole. It directs business to grant the shareholder primacy over all other considerations. The ideology has been falsified many times, but nevertheless remains dominant as a belief system, promoted by and serving the interests of ‘organised money. The ideological pretence which accepts that belief system, is heading the world towards destruction. The essential and now urgent reversal of strategy will require a fundamental change of culture and economic belief in order to enable the essential systemic correction.

Chapter 3: The Separate Legal Entity and the Architecture of the Modern Corporation Jeroen Veldman This chapter focuses on the separate legal entity as the defining element of the architecture of the modern public corporation. As a highly specific legal construct, the separate legal entity provides the basis for a structure of rights and obligations between corporate constituencies and for the circumscription of the function and mandate of the board. This analysis is used to explain how the currently dominant notion of the corporation as a nexus of contracts ignores both the problematic status of the separate legal entity and the specificity of corporate architecture. The chapter argues that this negation is the basis for the prioritization of claims by particular constituencies and puts the legitimacy of the use of the modern public corporation and its effects in question.

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Chapter 4: Dismantling the Legal Myth of Shareholder Primacy: The Corporation as a Sustainable Market Actor Beate Sjåfjell The achievement of the UN Sustainable Development Goals, which may be said to epitomise the overarching goals of the global society, is unlikely. A fundamental transition away from ‘business as usual’ and onto a sustainable path is necessary. Such a fundamental transition requires sustainable market actors. This chapter focuses on what this means for business and more specifically, for the dominant business form of the corporation. In a time where social entrepreneurship in various shapes and sizes receives much (and undoubtedly warranted) attention, whether and how the dominant business form of the corporation fits into a sustainable future also needs to be discussed. This can be rephrased as a question of how to achieve corporate sustainability. Corporate sustainability is here defined as when businesses (or more broadly, market actors) in aggregate create value in a manner that is (a) environmentally sustainable in the sense that it ensures the long-term stability and resilience of the ecosystems that support human life, (b) socially sustainable in the sense that it facilitates the respect and promotion of human rights and of good governance, and (c) economically sustainable in the sense that it satisfies the economic needs necessary for stable and resilient societies.

Chapter 5: Climate change, Business transformation Mick Blowfield Can we beat climate change? For business, there are two sides to answering that question. On the one hand, there are the consequences for business of actions to avoid a rise in global average temperatures. On the other hand, there are the consequences for business if it becomes apparent that the 2oC target will not be met, and therefore companies will inhabit an environment characterised by climate instability. In both cases, climate change challenges will make a fundamental difference not only to the way business operates, but also to governance, notions of value, the kinds of company that prosper, and the definition of a successful business. This chapter explains how climate change will fundamentally alter business, and sketches out what business needs to do—as well as what needs to be done to business—in order to ready commercial enterprise for the new era. It pays attention to the implications for governance—both governance by business and the governance of business. As well as identifying what aspects of business will be affected, it also asks what transformations are possible given the timeframe within which climate change action will take place.

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Chapter 6: Capitalism: Why companies are unfit for social purpose and how they might be reformed Lorraine Talbot This chapter argues that the neoliberal policies of successive western governments (in both their pure and third-way forms) have exacerbated the endogenous drive of capitalism to increase social and economic inequalities. It is argued that governments and multistate forums have hamstrung their ability to redress inequalities and enable social progress because they have integrated business in its own regulation by encouraging lobbying, corporate involvement in rule making and corporate control over regulatory gatekeepers. Corporate social responsibility too, represents a failure of governments to intervene in the interests of social need. The chapter concludes with some proposals to re-adjust the balance of power between corporate capital and people, making companies more fit for social purpose, while being cognisant that the primary problem is reliance on an economic system which is driven only by profit.

Chapter 7: Section 172 of the Companies Act 2006: Desperate times call for soft law measures Georgina Tsagas Section 172 of the Companies Act 2006 has been afforded much attention during Parliamentary discussions on the codification of directors’ duties and has since the enactment of the Companies Act 2006 occupied much space in discussions among scholars who share an academic interest in the shareholder/stakeholder debate, in policy documents on law reforms following a series of corporate failures, as well as in company law lecture notes provided by Law Schools across the UK. With the UK leaving the EU, it is a critical time to discuss enlightened decision-making on boards, considering that, arguably, one of the key benefits of joining the EU with regard to UK company law, was that the UK was prompted to consider incorporating provisions affording a certain level of protection to the interests of other constituencies across a wide range of company and securities law Acts and regulations. What often escapes the attention of participants in discussions surrounding s. 172 CA 2006, is the section’s limitations not so much in terms of it prioritising the interests of shareholders over the interests of other constituencies, but with regard to its enforcement and utility overall. The purpose of this chapter is twofold. First it aims to shed some light on the background and function of section 172 CA 2006. Secondly, after considering the challenges, shortcomings and dilemmas surrounding the function of this section, it suggests ways forward by proposing a change in the mode of regulating this aspect of managerial conduct. Ample evidence suggests that section 172 CA 2006 in its hard law form will not facilitate the goal of promoting the ‘good governance’ of companies

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that have a high impact on society in terms of enlightened decision-making. Thus, the chapter aims to advance an important aspect of UK corporate law in the making: namely suggest the use of alternative means available in the soft law sphere, that could support a more pluralistic and democratic formation of corporate decision-making.

Chapter 8: Corporate Governance, Responsibility and Compassion: Why We Should Care Charlotte Villiers This chapter argues that a key barrier to responsible corporate governance practice is the hierarchical structure of ‘traditional’ large corporations. This hierarchy, coupled with an individualistic, profit seeking approach, obstructs the broader goals and possibilities of corporate governance. Feminist literature and positive organization scholarship are explored as possible theoretical territories in which solutions to the problems might be found. The ethic of care has a relational focus which recognizes the interdependencies existing inside and outside the organization. Similarly, a literature has grown emphasizing compassion as a behavioural principle. This dual focused approach gives rise to a preference for a more horizontally structured organization— rather than a bureaucratic and hierarchical form—to nurture the relationships involved, with greater care and compassion. This approach, it is argued, offers more fertile ground for positive corporate behaviour.

Chapter 9: Beyond Shareholder Primacy—the case for workers’ voice in corporate governance Janet Williamson This chapter discusses the flaws of shareholder primacy and makes the case for workers’ voice in corporate governance. It sets out the Trades Union Congress’ (TUC’s) proposals for corporate governance reform, including revising directors’ duties and establishing the representation of workers on company boards. The TUC is calling for all companies with 250 or more staff to be required to include worker directors, elected by the workforce, on their boards. Worker directors should comprise one third of the board and would share the same legal directors’ duties as other company directors.

Chapter 10: The New Corporate Movement Nina Boeger This chapter explains the worldwide growth of social and cooperative enterprises as a counter-movement to global shareholder capitalism, at a time when traditional

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democratic structures suffer from systemic blockages (linkages between formal ­political process and global economic power organised in the shareholder corporate model). The underpinning framework follows Polanyi’s understanding of the relationship between markets and politics, as well as Touraine’s sociological work on what drives people to become social activists. The new corporate movement, this chapter argues, is a mode of social contestation characterised by entrepreneurial activism: it instrumentalizes economic freedom—the capacity to undertake economic actions— to transform the existing liberal into a more social market order.

Chapter 11: Recognising Facts in Economic Democracy David Erdal Neoliberal predictions for democratically structured businesses are contrasted with empirical evidence showing them to be false. The case of the democratic constitution of the John Lewis Partnership, and the wider economic effects of its implementation are examined. Working in a democratic business seems to have positive effects on social life and health. Economic democracy is significantly closer than the modern corporation to the social environment to which we are tuned by evolution. Wider economic democracy is likely to produce excellent results, both economically and socially.

Chapter 12: Can reduced shareholder power enable corporate stakeholder accountability? The case of Triodos Bank Stuart Cooper This chapter seeks to contribute to the debate on corporate stakeholder accountability. It draws upon key literature that theorises corporate stakeholder accountability as consisting of ‘three critical components’: ‘clarity of relationship’; ‘transparency’; and ‘power of accountees’ (Tello et al., 2016). This chapter argues, however, that for corporate stakeholder accountability to be realised transparency must enable evaluation, and ‘productive’ discussions with stakeholders (see Roberts, 1996) must ‘converge on a conclusion or course of action’ (Senge, 1990, p. 247). It is further contended that the primary obstacle to corporate stakeholder accountability is the power differentials that exist in stakeholder relationships. In this context, this chapter explores the post-financial crisis reporting of Triodos Bank. It is argued in this chapter that Triodos Bank’s unusual share ownership and governance arrangements are such that the power differentials are reduced, and the consequences of this for the Bank’s stakeholder accountability are examined.

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Chapter 13: The arrival of B Corps in Britain: another milestone towards a more nuanced economy? David Hunter This chapter considers the introduction of the B Corp designation into the United Kingdom in 2015. In addition to looking at what B Corps are, and how and why a business might choose to become one, it identifies both the growth of social enterprise in recent years and residual concern with corporate excesses as the context for the rise of the B Corp and whether this may be one more step on a longer journey to a corporate culture and economy with a focus on meeting broader stakeholder, rather than narrow shareholder, interests as the primary motivation and measure of success.

Chapter 14: Danish Foundations and cooperatives as forms of corporate governance: origins and impacts on firm strategies and societies Peer Hull Kristensen and Glenn Morgan This chapter seeks to recover the idea of a diversity of organizational forms by examining the experience of Denmark, a country where other forms of ownership, particularly cooperatives and industrial foundations, are common. The aim is not just to describe the Danish system but to explore the social origins and social consequences of these forms. In particular, the chapter returns to the idea that collective forms of organization are responses to the challenges that face actors in particular circumstances and under particular institutional constraints and enablers.

Chapter 15: What’s in a name? Reflections on the marginalisation of the co-operative as an organisational form Anita Mangan The co-operative organisational form has never been more successful in the UK, with co-operatives contributing over £37 billion across all sectors of the economy in 2015 (Mayo 2015). The economic data would suggest that co-operatives are in rude health as they continue to grow in popularity. This chapter, however, argues that these figures might mask a more deep-rooted issue related to a decline in public knowledge about co-operatives. Drawing on my experiences of participating in two community-focused social innovation workshops, it is argued that co-operative principles and organisational structures are almost unknown outside those who already engage with co-operatives (either as member-owners, employee-owners or activists).

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Although there has been a surge of enthusiasm for terms such as co-production, co-creation, co-design and collaboration in recent years, the terms ‘co-operate’, ‘co-operation’ and ‘co-operative’ rarely feature in conversations about social innovation and social change. Social enterprise and collaboration seem to be the preferred terms in use. The chapter explores differences between co-operatives and social enterprises as organisational forms, arguing that the co-operative principles of principles of education and training for members, co-operation among co-operations and concern for the wider community offer a broader range of possibilities for creating social action, social justice and social innovation.

Chapter 16: The internationalisation of the FairShares Model: where agency meets structure in US and UK company law Rory Ridley-Duff This chapter is a reflexive analysis of factors that are affecting the internationalisation of the FairShares Model (FSM) in the US and UK. The goal of the paper, however, is to explore how Giddens’ (1984) structuration theory offers insights into the formation of social enterprises that deploy alternative approaches to incorporation. Between September 2015 and January 2016, three social entrepreneurs used the FSM to constitute two new companies in the UK and US. A study of FSM early adopters provides an opportunity to explore how agents (social entrepreneurs) rewrite structures (Articles of Association) when they form a new social enterprise. By examining how the Articles of Dojo4Life Ltd (UK) and AnyShare Society (US) changed during debates about incorporation, the dialectical relationship between social entrepreneurial agency and institutional structures can be theorised.

Chapter 17: The Politics, Policy, Popular Perception and Practice of Social Enterprise in the 21st Century Dan Gregory This chapter is an informal, discursive attempt to review the development of the social enterprise movement in the UK over the last two decades, in four respects. First, it considers the politics of social enterprise, in terms of its relationship to more macro political tides and sentiments, and emerging ideological currents. Second, social enterprise policy at the more functional level of Whitehall, through government departments, programmes and initiatives (mainly England focused but sometimes UK-wide). Third, it explores how popular perception of social enterprise has evolved over the same period; in the press, media and among the public at large. Finally, it assesses the more practical progress of social enterprise in our economy; in towns, cities and villages across the UK. Evidence and data is provided at various points occasionally

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throughout this chapter but, to a significant degree, the observations here represent a rather personal assessment of where we are in the UK with social enterprise as a movement. The author has spent most of the 21st Century working in and around the social enterprise sector in roles which have concerned themselves with policy, politics and public perception of social enterprise. So, while this experience hopefully allows first-hand, expert insight to emerge, it also inevitably renders this chapter inherently rather subjective.

Chapter 18: Lessons from the Community Interest Company Nina Boeger, Sara Burgess and Julie Ellison While not without its limitations, the operation of the UK’s Community Interest Company (CIC) model for more than ten years has produced important lessons on how social enterprises operate, on how to make them successful and how to regulate them. The introduction of the model, that necessitates a particular type of governance, has played a role in the development of the social enterprise movement in the last ten years, and in the continuing consideration of running business without losing sight of the wider community. Building on these insights, this chapter considers some of the lessons concerning the governance and funding of social enterprises, and their ability to demonstrate social impact, which the operation of the CIC model has revealed.

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FOREWORD

In his 1993 Foreign Affairs article that was the precursor to his book on the Clash of Civilizations, Samuel Huntington emphasises the significance of race and ­religion, of countries and continents, of the West and the rest, but he omits consideration of one of the most important influences on civilisations in the twentieth and twenty-first centuries. It is not the state, religion or the monarchy. It is an institution that clothes, feeds and houses us. It employs us and invests our savings. It is the source of economic prosperity and growth of nations around the world. But at the same time, it is the cause of terrible poverty, depravation and environmental degradation. And it is getting worse. The reason it is getting worse is that corporations have grown to a size where in some cases they are bigger than countries. And as governments increasingly find themselves unable to shoulder their debt burdens, they turn to corporations to provide the goods and services that they supplied in the past. But are corporations capable of bearing the responsibilities that are being placed on them? The evidence is not encouraging. Over the last few years there has been a ­collapse of trust in corporations. At first we associated this with banks and financial services, but increasingly we have come to realise that it afflicts everything from automobiles to energy, from food to pharmaceuticals. At the same time, technological advances offer the prospect of corporations contributing to the betterment of mankind on a scale that was unimaginable in the past in everything from automobiles to energy, from food to pharmaceuticals. Corporations are both the cause of and solution to the clash of civilisations and a breakdown of trust. Take China as an example. The remarkable growth of the Chinese economy is on the back of first its state-owned and more recently its private enterprises. In Japan, bank-owned enterprises were behind the high growth era. In Korea, the chaebol firms have been the source of its remarkable transformation from being one of the poorest countries in the world. But at the same time, Chinese firms have been the source of terrible environmental pollution, Japanese firms of the collapse of the banking system and the lost decade, and Korean firms of corruption and divisions in Korean society. Still more seriously, the absence of large indigenous domestic corporations outside of the resource extraction sectors have been the source of many of the economic problems and social conflicts of Africa and the Middle East.

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In the West, the corporation is associated with egregious levels of inequality between those at the top and the bottom of organisations, of the continuing employment of slave labour in supply chains, and in a failure of corporations to pay their fair share of taxes. It is remarkable how one institution can explain so much of the collapse and growth of nations, poverty and its alleviation, of the destruction of societies and the creation of social networks, of environmental degradation and the solution to environmental problems. It is remarkable how one institution can be a sole proprietorship, a corner shop, a multinational organisation, a social enterprise, an infrastructure provider or a manufacturing firm, a no tech, a low tech and a high tech firm. And with technological advances, the corporation has the opportunity to transform our lives around the world even further for the better. But at the same time, globalisation is destroying our identities and communities, technology our jobs and livelihood, and financialisation our sense of purpose and self-worth of anything other than money. We are poised between creation and cataclysm, between civil society and the clash of civilisations. To ensure that we achieve creation and not cataclysm, the corporation has to restore trust—trust in others to uphold our interests. In a world of increasing uncertainty, we rely on others not only to keep to their word but also to have deep empathy and interest in our wellbeing. To do that the corporation has to restore its humanity. The corporation today is inhumane. It is inhumane because we have taken humans and humanity out of it. Stephen Hawking has warned of the consequence of removing humans from control of artificial intelligence and making us no longer masters of our own minds. We have already done that in the corporation by allowing markets not men to become masters of our machines and money. Re-establishing trust requires individuals of integrity to regain the moral high ground and promote corporations with purpose. By systematically eradicating the humanities from the study of economics and business, we have lost our moral compass in equating purpose with profit. That was not the original foundation of the enlightenment in emphasising rationality over religion. On the contrary, Adam Smith was careful to balance the emphasis he placed on markets in the Wealth of Nations with morality in a Theory of Moral Sentiment. But that balance has been lost in emphasising economic efficiency over ethics. We need to correct this as a matter of urgency and put humanity and the humanities back into business. Restoring trust in corporations is the most important issue of this decade. Without it economic systems will fail, financial systems will collapse, the environment will continue to degrade, and civilisations will clash. With it, we can achieve higher levels of economic prosperity and social wellbeing than have been possible to date. Because ultimately a moral corporation is a commercially successful corporation and the competitiveness of nations depends on the moral fibre of its corporations.

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This book is a wonderful statement of what is required to shape and reshape the corporate landscape to achieve this. It is a compilation of articles by leading thinkers in the field from economics, law, management studies and sociology. It is a treasure trove of ideas and knowledge from which we will all learn and benefit. It deserves to be read with care. Colin Mayer Peter Moores Professor of Management Studies Said Business School, University of Oxford 8 July 2017

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ACKNOWLEDGEMENTS

Collaborating on this book project has been a pleasure. We are hugely indebted to one another for completing this volume together, for bouncing ideas off each other and sharing both the pleasures and frustrations that come along with a project like this one. Having completed it, we hope that this collection of essays will stand out not only for its academic insights and for the wider contribution it can make towards pointing us in directions that will help to make our economies, and business enterprises, work in more humane ways. We hope that this collection can also stand as a showcase for how nurturing creative collaboration and mutual responsibility helps us in working these things out, as complex as they may be. In this way, we are also deeply grateful for the commitment that the individual authors to this volume have shown, both in their initial contributions to the symposium upon which the book is based, but also in composing their chapters and in responding to our comments and requests as editors. This book reflects their commitments and demonstrates how working across disciplines in an interdisciplinary manner can generate creative possibilities that make it possible to look at contemporary problems, however complex they may be, in a variety of new ways. We are grateful also to the University of Bristol’s Faculty of Social Sciences and Law for making available funding from their AHRC Transformative Social Sciences Fund to support our initial symposium, and to Policy Bristol and the University for Bristol, for contributing substantial funds. Within the University of Bristol Law School, our heartfelt thanks go to Paddy Ireland, Dean of the Faculty of Social Sciences and Law, and Joanne Conaghan, Head of the Law School, not only for their consistently good humour but also for their staunch support of our project. Finally, we would like to express our special gratitude to Roberta Bassi whose editorial guidance at Hart Publishing has been wonderfully helpful, patient and supportive.  NB and CV London and Bristol, July 2017

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CONTENTS

Preface�������������������������������������������������������������������������������������������������������������������������v Foreword�������������������������������������������������������������������������������������������������������������������xv Acknowledgements���������������������������������������������������������������������������������������������������xix List of Authors������������������������������������������������������������������������������������������������������� xxiii

Introduction���������������������������������������������������������������������������������������������������������������1 Nina Boeger and Charlotte Villiers Part I: Corporate Reform 1. Corporate Schizophrenia: The Institutional Origins of Corporate Social Irresponsibility���������������������������������������������������������������������������������������13 Paddy Ireland 2. Destruction by Ideological Pretence: The Case of Shareholder Primacy�������������������������������������������������������������������������������������������������������������41 Gordon Pearson 3. The Separate Legal Entity and the Architecture of the Modern Corporation������������������������������������������������������������������������������������������������������61 Jeroen Veldman 4. Dismantling the Legal Myth of Shareholder Primacy: The Corporation as a Sustainable Market Actor��������������������������������������������������������������������������77 Beate Sjåfjell 5. Climate Change, Business Transformation�����������������������������������������������������95 Mick Blowfield 6. Capitalism: Why Companies are Unfit for Social Purpose and How they Might be Reformed����������������������������������������������������������������107 Lorraine Talbot 7. Section 172 of the Companies Act 2006: Desperate Times Call for Soft Law Measures������������������������������������������������������������������������������������131 Georgina Tsagas 8. Corporate Governance, Responsibility and Compassion: Why we should Care���������������������������������������������������������������������������������������151 Charlotte Villiers

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Contents

9. Beyond Shareholder Primacy—The Case for Workers’ Voice in Corporate Governance���������������������������������������������������������������������173 Janet Williamson 10. The New Corporate Movement���������������������������������������������������������������������189 Nina Boeger Part II: Enterprise Diversity 11. Recognising Facts in Economic Democracy�������������������������������������������������213 David Erdal 12. Can Reduced Shareholder Power Enable Corporate Stakeholder Accountability? The Case of Triodos Bank���������������������������������������������������233 Stuart Cooper 13. The Arrival of B Corps in Britain: Another Milestone Towards a More Nuanced Economy?���������������������������������������������������������������������������253 David Hunter 14. Danish Foundations and Cooperatives as Forms of Corporate Governance: Origins and Impacts on Firm Strategies and Societies�����������271 Peer Hull Kristensen and Glenn Morgan 15. What’s in a Name? Reflections on the Marginalisation of the Co-operative as an Organisational Form�������������������������������������������289 Anita Mangan 16. The Internationalisation of the FairShares Model: Where Agency Meets Structure in US and UK Company Law���������������������������������������������309 Rory Ridley-Duff 17. The Politics, Policy, Popular Perception and Practice of Social Enterprise in the Twenty-first Century���������������������������������������������������������333 Dan Gregory 18. Lessons from the Community Interest Company����������������������������������������347 Nina Boeger, Sara Burgess and Julie Ellison Conclusion�������������������������������������������������������������������������������������������������������������365 Nina Boeger and Charlotte Villiers Epilogue: Necessity, Organisation and Politics�����������������������������������������������������375 Martin Parker

Index�����������������������������������������������������������������������������������������������������������������������383

LIST OF AUTHORS

Mick Blowfield is an action-oriented researcher specialising in the business interface with climate change and sustainable development more generally. Mick is currently Director of the Shaping Sustainable Markets group at the International Institute for Environment and Development, where he oversees a programme covering business transformation, the green economy, small business and the informal sector, and sustainable development finance. He has published extensively on business and sustainability, and his new book will be on how climate change will reshape the meaning of business success. Nina Boeger is a Solicitor and Senior Lecturer in Law at the University of Bristol Law School. Nina has interests in corporate governance and particularly the emergence of alternative corporate forms and social enterprise. She is Director of the Law School’s Centre for Law and Enterprise, and works with social, mission-led and cooperative enterprises across the UK. Sara Burgess was Regulator of Community Interest Companies in 2007-2015. She has over 30 years’ experience of working in the voluntary and community sector and with social enterprise in a professional capacity and as a volunteer, and she currently works for Devon County Council. Sara is on the Boards of Directors of Social Enterprise Mark CIC, Iridescent Ideas CIC and Cornwall School for Social Entrepeneurs CIC. She also does some consultancy work around social enterprise. Stuart Cooper is Professor of Accounting at the University of Bristol. His research interests include issues related to the effects of organisations on environmental sustainability and social justice. He is particularly interested in accountability mechanisms and how organisations measure, manage and communicate their environmental and social impacts to their stakeholders. Julie Ellison has been supporting the start-up and growth of social enterprises since 2002 working with local, national and international partners to develop ­ecosystems of support for social enterprise and social entrepreneurs. Julie is currently working at Bath Spa University as a lecturer in Social Innovation and Enterprise and is the Visions in Leadership and Business module tutor, previously Third Sector Entrepreneur in Residence at the University of Bristol.  Julie also works as an associate business adviser and consultant for the ERDF funded Social ­Enterprise

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and Innovation Programme in the West of England and is on the Board of Directors of Catalyse Change CIC and Stroud Trust. Dan Gregory works to support the funding and finance of social enterprises. He spends some of his time as Director of Policy for Social Enterprise UK and the Social Economy Alliance but also works independently under the banner of ­Common Capital. He used to work for HM Treasury and the UK Cabinet Office and in France, Brussels and Germany. Peer Hull Kristensen is Professor Emeritus in Business Sociology at the Department of Organization, Copenhagen Business School. His research is focused on national business systems, in particular the Danish; and on globalization, in particular the organization of multinational corporations. His most recent book (with Kari Lilja) is Nordic Capitalisms and Globalization: New Forms of Economic Organization and Welfare Institutions (Oxford, Oxford University Press, 2011). David Hunter is a solicitor with Bates Wells Braithwaite LLP. His clients are generally organisations working for public benefit, whether as charities, social enterprises or social investors. Alongside this work which occupies half of his time, David is actively involved in local currency and food projects, in a Joseph Rowntree Charitable Trust programme funding sustainable futures and as a Research Fellow at University of Bristol exploring the responsible business concept and practice. Paddy Ireland is Professor of Company Law at the University of Bristol Law School. He has written extensively on the historical development of company law in the UK, on corporate theory, and on corporate governance—all from a critical perspective. Paddy’s work is interdisciplinary in nature, drawing insights not only from legal scholarship but from political economy and social theory. David Erdal designed and led the all-employee buy-out of Tullis Russell, completed in 1994. He then led Baxendale for some years as it became a consultancy helping companies achieve such transformations. He is the author of two books on all-employee ownership: Local Heroes (London, Penguin, 2008) and Beyond the Corporation: Humanity Working (London, Bodley Head, 2011). Anita Mangan is Senior Lecturer in Management at Keele University, UK. Her research focuses on co-operatives, alternative modes of organising and community activism, with emphasis on issues of identity and subjectivity, power and control. She has been funded by the Daiwa Foundation, HEFCE and the AHRC’s Connected Communities programme. She has published in Sociology, Human Relations, Organisation and Management Learning. Colin Mayer is Professor of Management Studies, Saïd Business School, University of Oxford. His recent book Firm Commitment: Why the Corporation is Failing Us and How to Restore Trust in it (Oxford, Oxford University Press, 2013) sets out an agenda for converting the corporation into a twenty-first century organisation that we will value and trust.

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Glenn Morgan is Professor of Management in the School of Economics, Finance and Management at the University of Bristol. Previously he has been Professor at Cardiff Business School and Warwick Business School as well visiting professor at the Department of Business and Politics, Copenhagen Business School. Recent co-edited books include Elites on Trial (Bingley, Emerald Publishing, 2015) and The Oxford Handbook of Sociology, Social Theory and Organization Studies (Oxford, Oxford University Press, 2015). Martin Parker works at the School of Business, University of Leicester. He writes about alternative forms of organizing, and his latest book is Daniel Defoe and the Bank of England (Zero Books, 2016). His next projects are going to be about the history of the zoo, and the weeds that grow on motorway verges. Gordon Pearson is Honorary Senior Researcher and former head of the ­Management School at Keele University. He has held industrial responsibilities in production, marketing, strategic management and finance. Gordon has w ­ ritten over 70 articles and nine books, including Road to Co-operation: Escaping the ­Bottom Line (Aldershot, Gower, 2012). Rory Ridley-Duff is Reader in Co-operative and Social Enterprise at Sheffield Business School, where he is lead academic for the FairShares Institute for Cooperative Social Entrepreneurship as well as Chair of the Principles of Responsible Management Education Group (PRME). His external responsibilities include board membership of the UK Society for Co-operative Studies, a directorship of Social Enterprise International Ltd, an editorial advisory role for the Social ­Enterprise Journal, and Research Fellowship at Oxford Brookes University. Beate Sjåfjell is Professor Dr Juris at the University of Oslo, Faculty of Law, Professorial Research Fellow at Deakin University School of Law, and coordinates several international networks and projects, including the H2020-funded research project Sustainable Market Actors for Responsible Trade (SMART, see smart.uio.no). Professor Sjåfjell’s publications include the edited volumes The Greening of European Business Under EU Law (Abingdon, Routledge, 2015, co-editor Anja Wiesbrock), Company Law and Sustainability (Cambridge, Cambridge ­University Press, 2015, co-editor Benjamin Richardson), Sustainable Public Procurement under EU Law (Cambridge, Cambridge University Press, 2016, co-editor Anja Wiesbrock), and Creating Corporate Sustainability (Cambridge, ­Cambridge ­University Press, forthcoming 2018, co-editor Irene Lynch Fannon). Lorraine Talbot is Professor of Company Law in Context at York Law School. Her work is concerned with the tension between labour and capital in the company and how the company might become a force for social progress: www. ipsp.org/. She is Coordinating Lead Author in the International Panel for Social Progress and is currently completing a Leverhulme funded project on redressing c­ orporations’ global extraction of value. Lorraine is the author of Progressive Corporate Governance for the 21st Century (Abingdon, Routledge, 2013), Great

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Debates in Company Law (London, Palgrave, 2014) and Critical Company Law (London, Routledge Cavendish, 2007; 2015). Georgina Tsagas is a Solicitor qualified in England and Wales and a Lecturer in Corporate Law at the University of Bristol Law School. She has written widely on various aspects of UK and EU takeover regulation, as well as on the regulatory powers of the European Supervisory Authorities. She is a member of the EU funded research project Sustainable Market Actors for Responsible Trade, sponsored by the EU’s Framework programme Horizon 2020 and undertaken by a research group promoting global sustainable development led by the University of Oslo. Jeroen Veldman is Senior Research Fellow at Cass Business School, City University, London. His research addresses the historical development of the public limited liability corporate form and its current status in organisation studies, management, company law, economics, finance, accounting and politics. With Hugh Willmott, he is engaged in a research project on corporate governance (www. themoderncorporation.com/). Charlotte Villiers is a Solicitor and Professor of Company law and Corporate Governance at the University of Bristol. She has written several books and ­articles on various aspects of corporate governance, including Company Law and Corporate Reporting (Cambridge, Cambridge University Press, 2006). She has been a member of the Research Team on the Sustainable Company Law Project led by the University of Oslo, for which she wrote papers on the issue of accounting and integrated reporting.  Janet Williamson is a Senior Policy Officer in the Economic and Social Affairs Department of the Trades Union Congress, and is responsible for policy on corporate governance, institutional investment, executive pay and corporate social responsibility. She has written a wide range of TUC reports and submissions on these and other areas, including recently ‘All Aboard: Making worker representation on company boards a reality’. Janet is the Chair of Trade Union Share Owners, an initiative that brings together union funds to collaborate on voting and engagement at company AGMs, and a trustee of the TUC Superannuation Society.

Introduction NINA BOEGER AND CHARLOTTE VILLIERS This book brings together a collection of chapters that identify and address ­fundamental problems with the activities of large companies. So many and so serious are these problems that we are led to question the plausibility of a future for the existing corporate governance frameworks in the UK, Europe and beyond. The established influence of a neoliberal ideology that underlies numerous failures has led to serious questions being asked of the system and whether or not it remains tenable. This book contains a variety of suggestions for repairing and renovating the broad existing framework as well as discussing alternative business forms that step outside of that framework and provide at least a parallel if not a replacement model of economic functioning. The chapters are the product of and responses to a symposium held at the University of Bristol Law School in June 2016 at which the authors presented and discussed the papers. Numerous themes emerged at the symposium and in this introduction we seek to bring out those themes that will then be elaborated upon in further detail within the individual contributions. First, we describe the problems that have been identified with corporate activity and how such activity is regulated. Second, we put forward some of the c­ onceptual transformations that might be necessary to deal with the problems identified. Third, we introduce the alternative business forms that have been established and which are explored more fully by the authors. Fourth, we make some suggestions for different behavioural and organisational approaches that in turn challenge the existing ideologies that currently dominate the economic and regulatory hegemonies. Fifth, we recognise the continuing institutional and political obstacles but we point out that by meeting these challenges we have the potential for a more democratic and positive economy.

I.  Contextual Challenges We are in the midst of serious social and environmental challenges, including climate change threats, mass migrations and major levels of income and wealth inequality. These challenges are deepened as significant political changes are in

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progress as the Brexit process is now under way and we are noting increasing signs of economic protectionism across the globe, not least since the inauguration of President Donald Trump in the US. One of the challenges lies in the rising levels of public distrust as citizens observe abuse of wealth and power by the ‘elites’ of the business and political circles. Numerous authors in the book refer to the Panama Papers leak that exposed a system in which secretive offshore companies have hidden crime, corruption and wealth details of business and political leaders and the super-wealthy (Hunter, Sjåfjell, Villiers). Many of the world’s problems have been linked to the activities of large corporations and their involvement has created suspicion and distrust. Despite attempts by corporate actors to ensure, or at least to give an impression of, better behaviour, there has grown widespread criticism of corporate social responsibility and of well-established corporate norms and concepts such as the shareholder primacy norm. Hunter, for example, tells us that ‘CSR has been co-opted by some businesses, making it part of their marketing and branding and obfuscating the more detrimental aspects of their activities.’ We are currently facing a legitimacy crisis of corporations and executives. This legitimacy failure arises out of the opaque nature of shareholdings and the impact of shareholders’ decisions in general meetings. Shareholders and managers appear to have abandoned their fiduciary duties to the corporation and have extracted value for coupon holders and themselves (Ireland). This has been encouraged by the shareholder primacy model that has the effect of prioritising shareholder interests and giving precedence to short term, profit-oriented goals rather than long term objectives that comprise a broader set of aims, l­eading to value extraction, or rent extraction (Williamson). This shareholder primacy model is at the heart of the destructive forces of financialisation, which has become a key word for the crisis of capitalism and for economic failures and resulting austerity programmes. The shareholder primacy model has been identified by critics of corporate governance as the fundamental problem because it rests on false assumptions about the role of the shareholders as ‘owners’ of the company. Williamson describes the model as ‘dysfunctional’. As Pearson tells us, shareholder primacy ‘is not a valid theory, nor a clear legal relationship; it is a wilfully blind belief system’ with a false theoretical base and ambiguous legality since there is very little real legal support for it. Despite its mistaken legal underpinnings, ‘though widely falsified, shareholder primacy remains as a belief system shaping human behaviour across the corporate landscape and beyond.’ It is clear to many scholars contributing to this book that we need to reduce the force of the shareholder primacy model. As Sjåfjell tells us, ‘the social norm of shareholder primacy must be identified and mitigated’ and Pearson is clear that ‘escape from its grip is essential if this generation is to fulfil its duty to bequeath a planet as viable as the one it inherited’. A connected problem rests in the hierarchical structures of our political economy and our traditional large corporations which present barriers to more

Introduction

 3

democratic ways of running businesses and that result in exploitation of the lower ranked workers. Kristensen and Morgan observe that institutional path dependencies arise where actors are already organised hierarchically with strong social and economic distinctions between rich and poor, between those who hold forms of capital which are fungible and transferable across different assets and those who survive only by virtue of their labour power. In these situations, the responses to the challenges of large-scale organisation are likely to be dominated by the more powerful actors who seek to create organisational forms which reproduce and extend their status and position in control of both the firm and the society. Such contexts encourage the joint stock limited liability company where power over the purpose of the corporation is defined in terms of the benefits generated firstly for those rich enough to invest or own collective enterprises and secondly for those who act as their agents in the running of the company, ie senior managers.

Erdal points out that despite efforts to create more egalitarian arrangements, nonetheless when we go to work we are thrust back into the more ape-like conditions of hierarchy, dominance and tricks like the employment contract that remove the democratic rights altogether: we have no right to participate except as instructed by the dominant hierarchy; we have no influence on decisions nor on who takes the decisions; and far from receiving a fair share of the wealth we create, we see it removed and passed to the ‘owners’.

Again, these problems are exacerbated by the continued adherence to the free ­market ideology by ‘the leaders of business in the real economy, of finance, the media, relevant academia and much of the political sector—what Roosevelt referred to as ‘organised money’ (Pearson). This domination by the free market ideology ‘only accelerates and multiplies the problems, rather than hastening their correction’ (Pearson). Even the policies developed to meet the significant threat of climate change appear to be based on the assumption of a modified business as usual (Sjåfjell, Blowfield) replacing fossil fuels with low carbon or low energy fuel, and markets as prime (Blowfield). Some authors question this approach and are clear that ‘the “business as usual” path that market actors in aggregate are following is not an option for sustainability; it is a very certain path towards a very uncertain future’ (Sjåfjell). Indeed, to the authors brought together in this book, it is abundantly clear that we cannot do business as usual, and that our political and economic futures are uncertain. Moreover, we can only be certain that if we carry on as usual our environmental and social futures will be hugely difficult. The Brexit vote and Trump’s instatement to the US Presidency, born upon a tide swell of populism and protectionism, could be viewed as Polanyian backlashes against the political establishment and the economic hegemony of the free markets and labour exploitation (Talbot). Climate change and other crises represent ‘a transformation challenge for business’ (Blowfield) necessitating new legal requirements such as the Sustainable Business Plan proposed by Sjåfjell, and alongside these challenges the fast pace of development in technology brings with it threats and opportunities (Pearson).

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This convergence of potential crises that we are facing requires us to look for new ways of conducting business and trade and for the organisational vehicles that we use to be able to meet these challenges. These critical issues force us to consider and redefine the corporate purpose and to identify what must signify the role and duties of the board and the shareholders in general meeting (Sjåfjell) as well as to look beyond the conventional corporate form and, taking inspiration from existing alternatives such as cooperatives and social enterprises, we might find lessons in those examples of other business to find new ways of organising to benefit the entrepreneurs and the global society more generally. We must challenge as a ‘powerful but inaccurate myth’ the idea that there is only one appropriate form of organising collective economic activity and that it corresponds to the shareholder driven model of the limited liability (Kristensen and Morgan). We need a corporate law that is fit for purpose in the twenty-first century (Sjåfjell). As Blowfield reminds us, the other institutions that shape business actions (public policy, legislation, investor decisions, financial risk regulations and consumer behaviour) are not providing an environment that supports purposeful change (similarly, Boeger). This book seeks to lay down the foundations for a set of alternative ways of doing business by challenging the current hegemony and by presenting examples of already existing alternatives and, through these examples, suggesting better objectives, behaviours and structures.

II. Accountability The first step towards building trust in business is to establish stronger accountability to the stakeholders. This requires clarity of relationships, transparency, power of accountees, and transparent information and productive discussions. Indeed, power in stakeholder relationships may be an important influence (Cooper). Current power differentials have the effect that corporations are not accountable to their less powerful, more vulnerable stakeholders (Cooper). One way to address this may be to create worker representation among directors in UK company boardrooms. Several authors in this collection point to the problem of hierarchical structures (Cooper, Kristensen and Morgan, Villiers, RidleyDuff). Erdal notes that ‘in a corporate hierarchy, the people at the bottom are not acknowledged as what they are: independent and potentially creative individuals cooperating voluntarily.’ Villiers suggests that hierarchy leads to ‘a less beneficent culture.’ These authors express a preference for flatter, more holarchic structures (Ridley-Duff). As Cooper explains, ‘an essential component of corporate accountability is the ability for stakeholders to enter into discussions and to influence decisions’ but ‘the presence of hierarchical power destroys the possibility of such accountability’. Another key ingredient for achieving accountability is transparency. Cooper’s chapter explores the role of transparency in stakeholder ­accountability and notes that, alongside reducing power differentials,

Introduction

 5

‘­transparency must enable evaluation’, and ‘productive’ discussions with stakeholders must ‘converge on a conclusion or course of action.’

III.  A Variety of Different Business Forms This book identifies a variety of different business forms and confirms that the conventional corporate entity structure with a board of directors relating to the shareholders in general meeting does not have to be the only way of collective business activity for profit. In fact the range of different forms available highlights the possibility of and opportunities for innovation. These different forms also show that it is possible to emphasise goals other than profit maximisation and short term shareholder satisfaction. As Kristensen and Morgan argue, these different forms are associated with different corporate objectives because they do not have obligations to outside shareholders and this reinforces to a degree their origins in a more stakeholder oriented concept of collective economic activity. These structures, together with the welfare state, mitigate inequalities … and reinforce the idea of corporations serving a ‘social good’ whilst at the same time facilitating innovation and competitiveness by developing a highly skilled and trained workforce.

Some common features among these different business formats include common ownership, mutual self-help, democratic control and allowing workers and consumers to take control of production and consumption. The increasing levels of success of social enterprises, for example, demonstrate that a social solidarity economy is possible (Gregory, Ridley-Duff). Moreover, we can already observe a shift from a binary company/charity economy model to a much more varied economic landscape that comprises a range of different forms, including ­Community Interest Companies (Boeger, Burgess and Ellison), cooperatives, ‘bencorps’ and ‘B corps’ (Hunter). This variety of business formats could broaden the discussions beyond a focus on shareholder primacy or shareholder versus stakeholder debates and could support more democratic approaches to business and enterprise because they might accommodate a bigger set of interests. In addition, some of these newer corporate forms, such as social enterprises or B corps, favour a ‘profits for a purpose’ approach (Hunter). In Denmark cooperatives and industrial foundations have been very successful (Kristensen and Morgan) and elsewhere cooperatives have had an important influence within the debates and this is reflected within this book (eg Erdal, Villiers). Cooperatives offer more egalitarian and democratic arrangements because their structures are flatter and tend to operate on a partnership system in which the workers are partners. Erdal, for example, highlights the Mondragón cooperative network and the John Lewis Partnership, the key features of these being right to information, right to ­representation and right to share in the results. Similarly, Cooper describes the positive features of the Triodos Bank with its flatter structure and regular

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­ pportunities for employees to have discussions. A question that arises is why o cooperatives, with their apparent benefits, have not been adopted more widely and why are they not more influential in practice? The many different positive examples presented in the chapters of this book lead to the question of how they might become more influential and how their positive features can be adopted more broadly. Given the potential benefits to society, some authors look for the possibilities of ‘cross pollination’ (Hunter). One potential for such cross pollination might arise through innovation in legal reform. Section 172 of the Companies Act 2006, which is seen as a problematic provision (Tsagas), has suffered through ambiguity and does not facilitate good governance or enlightened decision-making. Some modifications could be made, taking into account experiences from alternative arrangements. Williamson suggests emphasising pursuit of strategies for long term success. Hunter notes the variation on section 172 of the Companies Act 2006 used in the legal test for a B corp. This requires the adoption of wording in the constitutional document which repeats section 172 (1) of the Companies Act 2006, with some small but significant alterations: The purposes of the Company are to promote the success of the Company for the benefit of its members as a whole and, through its business and operations, to have a material positive impact on society and the environment, taken as a whole. A Director shall have regard (amongst other matters) to: —— the likely consequences of any decision in the long term, —— the interests of the Company’s employees, —— the need to foster the Company’s business relationships with suppliers, customers and others, —— the impact of the Company’s operations on the community and the environment, —— the desirability of the Company maintaining a reputation for high standards of business conduct, and —— the need to act fairly as between members of the Company, (together, the matters referred to above shall be defined for the purposes of this Article as the ‘Stakeholder Interests’). For the purposes of a Director’s duty to act in the way he or she considers, in good faith, most likely to promote the success of the Company, a Director shall not be required to regard the benefit of any particular Stakeholder Interest or group of Stakeholder Interests as more important than any other. Nothing in this Article express or implied, is intended to or shall create or grant any right or any cause of action to, by or for any person (other than the Company). The Directors of the Company shall for each financial year of the Company prepare a strategic report as if sections 414A(1) and 414C of the Companies Act 2006 (as in force at the date of adoption of these Articles) applies to the Company whether or not they would be required to do so otherwise than by this Article.

Hunter asks if this wording might be adopted more broadly for all corporate organisational forms. This would perhaps address the problem of limiting the

Introduction

 7

capacity of companies to the goal of seeking profit. This narrow goal leads to a false perception that companies, whether limited by guarantee or shares, may not operate with objects that promote purposes other than maximising shareholder benefit. As Hunter observes, there is still a perception that unless you are a distinct legal form, such as a CIC, or charity or community benefit society, then you are a company and therefore exist to maximise profit. This remains potentially damaging, in that this default expectation of most limited companies inevitably influences behaviours.

This limitation is exacerbated by the fact that there is no guidance for directors on what promoting a company’s purposes other than shareholder maximisation means in practice in terms of their duties. As Hunter observes further, there is no reporting framework—as there is for CICs and B Corps—around delivery of community benefit or social impact. And there is no way to recognise instantly such a company with a social purpose distinctly from other companies generally as, again, there is with those enjoying the CIC suffix, and/or the B Corp certification.

A starting point towards broadening the scope of a company’s objectives— whatever the type of organisational form—might be to alter the wording of the legislation to make it more explicitly understood that a company director can and should think beyond shareholder maximisation in order to fulfil his or her duties. The existence and success of these alternative organisational forms, with their goals that step beyond profit maximisation, make possible other motives for all business forms. Hunter, for example, advocates love rather than power as the motive: [A]n economy and a business that embraces love as a positive force, rather than excluding it as irrelevant, has more prospect of retaining a focus on purpose and achieving success in delivering that purpose. It is the sort of success that has wide reaching benefits. It can contribute to reducing inequality; can avoid exploitation of workers, supply chains, customers and the environment.

Indeed, Hunter proposes looking for ways to ‘create a virtuous circle in investment terms’. A more compassionate and caring approach might be required and Villiers provides advice inspired by the feminist ethic of care and the positive organisation studies schools of thought with an emphasis on relational connectedness and collective power.

IV.  Alternative Business Goals The chapters in this book, by highlighting the different organisational forms and showing their potential for continued success, indicate that we do not have to be restricted by the mainstream business orthodoxies. Indeed, almost all the authors are clear that we must not continue with the ‘business as usual approach’ and that rather, we need to move away from narrow minded business school and management school thinking. Semantics are relevant, as Parker suggests, and he proposes

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that we should recognise the political nature of organisations and provide space for a much broader range of possibilities in terms of format, goals, activities and behaviours. Similarly, Mangan argues that we must bring cooperatives back into the picture. She suggests that social enterprise and ‘collaboratives’ have come to dominate the ‘alternative’ enterprise terrain and by allowing this to happen we have lost sight of what cooperatives have to offer. She advocates that we could view cooperatives more meaningfully. This observation reminds us that we need to be clear about the alternatives that are available and how they might provide a positive influence on the business and enterprise landscape. This requires us to clarify our understanding of some of those alternative formats. For example, B corps are a relatively new phenomenon and the definition of a B corp is still not fully clear beyond the three tests—performance, legal and interdependence declaration. Gregory also notes that social enterprise is ‘a somewhat vague and contested term, with no formal, legal basis, at least in the UK.’ We require greater clarity on these and on what they do in practice, but also we must understand what drives the entrepreneurship that leads to their emergence (Boeger).

V.  A New Cooperative Solidarity It is clear from the increase in the number of alternative enterprises that there is a desire for a more effective economy that meets societal need, suggesting these initiatives are beginning to take on the character of a wider movement (Boeger). The level of activity also indicates a wide recognition that the neoliberal doctrine has failed. The development of these different, more democratic organisations is part of a drive towards alternative wealth distribution, more egalitarian distribution of surplus, strong community commitments and contributors of all types with voice in governance and a share in economic and social returns. For example, Fairshares Management has links to cooperatives and social enterprise is representative of a social solidarity economy. In a similar vein, Cooper suggests that the ‘communicative action’ (per Habermas, 1984) style of deliberation with stakeholders adopted in the Triodos Bank signals a requirement for enhanced accountability. This form of deliberation is also necessary for stakeholders to be able to enter into a ­discussion with a corporation’s management and other stakeholders (Cooper).

VI.  Continued Contextual Challenges This book delivers an optimistic vision of our potential future corporate landscape but within it there is also a recognition that there are many challenges and hurdles that need to be met before such a future is achieved. As Ireland reminds

Introduction

 9

us, corporations still hold many important resources and products and so we need to examine ways for making these operate in more acceptable and e­ ffective ways. Alongside corporations, the potential for success in the social enterprise movement is evident. Gregory narrates the achievements of the social enterprise movement in the UK and Erdal notes the greater success of the John Lewis ­Partnership compared to Marks and Spencer, and he observes the spread of positivity through the wider economy. Similarly, Kristensen and Morgan highlight the successful cooperatives and industrial foundations in Denmark. However, despite these successes, the political context remains problematic following earlier ­mistakes. The previous neoliberal project led companies and organisations to outsource with a resultant loss of production and reliance on financial services. This led to a debt economy which was forced then to concentrate on pleasing the shareholders who were providing the finance capital. Talbot reminds us that capitalism itself is a major problem as it encourages profit focus and short termism manifested by exploitation of the environment, employees and the global workforce: [C]apitalism is in a destructive spiral. Corporations exploit the environment to ruinous degrees. Legal mechanisms ensure shareholders claim value from the productive activity of company employees and from exploited workers in global value chains. Corporations lobby for, and get, favourable regulation. They hire law firms and accountants to extract value, to hide liabilities and to avoid tax.

The consequent institutional framework that surrounds our businesses remains problematic. Indeed, Blowfield warns of the hostile surrounding environment: ‘the other institutions that shape business’ actions are not providing an environment that supports purposeful change. This is true of public policy, legislation, investor decisions, financial risk regulations, and consumer behaviour’. The political context is an important factor if these alternative forms are to gain traction, and so is their wider regulatory context (Boeger). As Gregory points out with regard to the social enterprise movement, ‘for social enterprise policy to be reinvigorated, a political shove from above is likely required.’ Similarly, technology has a doubleedged potential, as destructive and disruptive but also potentially as innovative and a source for new solutions. Veldman notes that the problems are exacerbated by the lack of clarity and the contestation around the purpose of the Separate Legal Entity and the resulting architecture that has placed shareholders and directors centre-stage, giving special privileges to the shareholders at the expense of the other constituent groups. Ireland talks about a financial oligarchy. Talbot observes that under this capitalist system profit is the main obstacle to creating a corporation that is fit for social purpose. The challenge for these other forms of business is how they might work beyond, or in spite of, capitalism. If they can achieve their goals in alternative ways this could have a broader positive influence. Cooper is optimistic about this: ‘there is great potential for productive and innovative accountability practices to be ‘emerging elsewhere than in listed company contexts’. If they are able to achieve their goals without a narrow profit-driven focus, then other positive changes might follow. As Talbot suggests, ‘remove that driver for corporate activity, add

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Nina Boeger and Charlotte Villiers

a political commitment to change in the interests of all people, and all things are ­possible’. It is arguably necessary for us to challenge the existing economic regime. The S­ eparate Legal Entity model is not a sufficient answer to the problems ­(Veldman). In such challenge lies the potential for new ways of doing things. As Kristensen and Morgan remind us: [C]ollective forms of organisation are responses to the challenges that face actors in particular circumstances where there are elements of institutional continuity and path dependence but there are also moments of openness when political struggle can make a difference and new paths can emerge and new experiments in the use of institutions and organisational forms can be undertaken.

Ultimately, our main message in this book is that we cannot continue with a ­business as usual mentality. If we do that the future of our planet is at stake. ­Ridley-Duff reminds us that social structures are products of human agency and free will. This lets us know that we can change things. We can find alternative forms of business and enterprise that focus less on profit and more on benevolence and societal and environmental well-being. Our book presents a starting point for this search. Already, there are many different models that provide inspiration for innovation. Most of these alternatives, having been developed at grass root level, are inherently more democratic in their structures and decision-making practices and recognise and reward the contributions of a broader set of constituents (Villiers). As Gregory remarks: ‘Across the UK we are creating and growing more democratic, fairer, more diverse, more innovative and more inclusive ­businesses, d ­ istinct and popular for how they trade.’ It is this democratic feature that is perhaps their strongest attribute because it speaks to a fundamental evolutionary social behavioural requirement. In the words of Erdal: [A]t the root of our evolved nature is a complex socially-tuned set of responses built around autonomy, recognition, the ability to decide on who gets to lead in any situation and a powerful reaction against arrogance. An egalitarian social environment is natural to us at a deep level.

Part I

Corporate Reform

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1 Corporate Schizophrenia: The Institutional Origins of Corporate Social Irresponsibility PADDY IRELAND

I. Introduction A few years ago, shortly after the scandal surrounding Libor had begun to break, I attended a seminar on corporate social responsibility (CSR). Libor was the latest in a long list of corporate scandals to come to light and I couldn’t help wondering why academics seemed more interested in corporate social responsibility than corporate social irresponsibility (CSI). Since then, of course, the scandals have continued to come thick and fast. Accounting scandals (Tescos, Toshiba) have piled up on top of tax avoidance scandals (Google, Amazon, Facebook, Starbucks, Apple), and an assortment of other improprieties (Volkswagen cheating with its emissions tests, Exxon Mobil apparently deliberately misleading the public about its research into climate change). Scandals of this sort are not, of course, new, but corporate irresponsibility does seem to be scaling new heights. In seeking an explanation, some would no doubt point an accusatory finger at the ideology of ‘maximising shareholder value’. And with good reason. But in recent years, shareholdervalue ideology has receded without any noticeable impact on corporate behaviour. Indeed, placing too much emphasis on its baleful effects risks causing us to overlook the more deeply rooted institutional foundations of corporate irresponsibility. This chapter explores these foundations. The potential for irresponsibility, it argues, is inscribed in the corporate legal form as currently constituted and thus in the property rights structures of contemporary capitalism. Paradoxically, it suggests, so too is the possibility of more ‘socialised’ corporations. While, therefore, experimentation with alternative organisational forms is vitally important to social transformation, with so many key productive resources under the direct or indirect control of corporations, so too is radical reform of the corporate legal form.

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II.  The Railtrack Cases I’m going to begin my exploration of the institutional roots of CSI by examining a couple of cases decided in autumn 2005. Both involved Railtrack, the group of companies created by the government to manage the rail infrastructure after privatisation in the early 1990s.1 In the first, decided in September, Railtrack was fined £3.5 million for the safety breaches which led to a crash at Hatfield in 2000 in which four people died and over 70 were injured. Hatfield was the third major crash in the five years after privatisation: at Southall in 1997, six people died and 150 were injured; at Ladbroke Grove in 1999, 31 people died and 523 were injured. All three accidents were attributed in significant part to factors under Railtrack’s control, in the case of Hatfield to cracks in the rails which the company had known about for two years but had not got round to fixing (Independent Investigation Board, 2006: 103–24).2 The Southall and Ladbroke Grove crashes were attributed variously to inexperienced and inadequately trained drivers, faulty equipment, poorly located signals, poor maintenance, failure to invest in safety enhancing technologies and so on. In the Hatfield case, the court condemned Railtrack’s attitude and safety record: it was, the judge said, the ‘worst example of sustained negligence in a high risk industry that he had ever seen’ (Milward, 2005). The second case, Weir & Others v Secretary of State for Transport & the Department of Transport, was decided a month later. It too arose out the Hatfield crash, albeit indirectly. Hatfield forced Railtrack to check for cracks across the railway system and this led to speed limits and line closures. As a result the company haemorrhaged money and was soon in serious financial difficulty, its shares plunging from an earlier high of over £17.50 to £4.00. The government considered various options, before settling on receivership. In October 2001 Railtrack plc was placed into administration and trading in the company’s shares, now virtually worthless, was suspended.3 Initially, the government refused to pay compensation, but two shareholder action groups were formed and the large institutional shareholders exerted intense pressure on the government (Butcher, 2010: 7). An offer of £2.50 per share was eventually made4 which the institutions and one of the action groups accepted, clearly reckoning they’d done as well as they could in

1  Railtrack was sold to the private sector in May 1996. By 2005, it had been replaced by the statecontrolled, non-profit company, Network Rail, a company limited by guarantee and formed in 2002. 2  Train Derailment at Hatfield: Final Report by Independent Investigation Board. 3  The shareholders had shares in Railtrack Group plc, whose main operating subsidiary, Railtrack plc, was the company placed into administration. Under European rules, had the company been re-nationalised shareholders would have been entitled to about £8 per share, the average price of the shares over the previous three years. Prior to suspension, the company’s shares were trading at £2.80; the three year average price included the £17.68 high. 4  The Government was particularly concerned about the reaction of the bondholders and large US institutions. In their internal communications, the small shareholders were variously (rather contemptuously) described as ‘grannies who might lose their blouses’ and ‘little old ladies’.

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the ­circumstances. But the other shareholder group, the Railtrack Private Shareholders Action Group (RPSAG), representing nearly 50,000 smaller shareholders, rejected the offer. The members of RPSAG organised and raised a total of nearly £4 million to hire lawyers to sue the government in the largest class action seen in British law. It was a phenomenal effort on their part (Private Investor, 2006: 3–4). Motivated by the belief that their property had been expropriated by the state, they expended a huge amount of time, energy and money bringing the case to court. They argued that the Secretary of State involved, Steven Byers, was guilty of breaches of the European Convention on Human Rights (expropriating property without proper compensation) and of misfeasance in public office (abusing his powers to engineer back door re-nationalisation). They were supported by many in Parliament and the media, particularly the Daily Telegraph and Evening Standard, who shared the shareholders’ view that their property had been stolen. Nobody, however, was quite sure what the stolen property was. Some suggested it was the shareholders’ shares; others that it was the company’s assets; still others that it was ‘the company’ itself. ‘We the shareholders owned RTK [Railtrack]’, claimed one shareholder; ‘Railtrack Group owns Railtrack plc and we shareholders own both’ claimed another (boards.fool.co.uk). Yet another accused the Government of plotting to ‘steal [the] company from its rightful owners’ (ibid). In similar vein, the Daily Telegraph wrote of the ‘expropriation of Railtrack’s owners’ (Daily Telegraph, 2002; Dakers, 2015; Gray, 2009; Inman, 2016).5 The case was lost. The claim that there had been a de facto expropriation was dropped during the course of argument and the shareholders’ other claims decisively rejected by the judge (Weir v Secretary of State for Transport, 2005). The abandonment of the expropriation claim was unsurprising: its weakness had led the lawyers representing the other shareholders to settle. In law, the company as a separate legal entity owns the corporate assets, not the shareholders; the shareholders own shares and in this case they were more or less worthless. Moreover, the idea that the shareholders of large public corporations like Railtrack ‘own’ the company is legally unsustainable. As many have pointed out, using Honore’s

5  Daily Telegraph, ‘The Bad Old Days’ (15 January 2002). A few years later similar claims were made by the shareholders of the collapsed bank, Northern Rock. They had been ‘robbed’, they argued, when the Bank of England abused its position of lender of last resort to enable the government to expropriate the bank’s assets: see Joanna Gray (2009) 467. The shareholders, a mixture of hedge funds and small holders, initiated proceedings against the government but the case was lost in both the High Court and Court of Appeal’ and the European Court of Human Rights unanimously dismissed their case as manifestly ill-founded and inadmissible: Dennis Grainger and others v UK (Application No 34940/10). The Chairman of the Northern Rock Shareholders Action Group, Chris Hulme, declared the decision a violation of property and ownership rights: www.telegraph.co.uk/finance/newsbysector/banksandfinance/9445059/European-court-rejects-Northern-Rock-shareholders-case.html. Two hedge funds led the action, claiming that shareholders should have received £4 a share given the bank’s substantial assets: see Marion Dakers (2015). But the accountancy firm, BDO, concluded the shares were worthless at the time of nationalisation: see Phillip Inman (2016).

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‘­incidents of ownership’ as a yardstick, shareholders possess few of the rights of corporate owners (Kay, 1997; Ireland, 1999). It nevertheless remains an important and powerful part of our everyday, taken-for-granted common sense. ‘Back when I was a law student in the early 1980s’, Lynn Stout recounts, ‘my professors taught me that shareholders “own” corporations … [A]t the time … this made sense enough to me’ (Stout, 2012). The significance of this should not be underestimated, for legally unsustainable though it may be, it played a key role in the Railtrack cases and perpetuates the idea of shareholder primacy as a simple matter of property right. Thus when the law asserts that directors are legally bound to promote the ‘interests’ or ‘success’ of ‘the company’, this is usually interpreted to mean the interests of the company’s shareholders.

III.  Corporate Schizophrenia The Railtrack cases are illustrative of the schizophrenic nature of our ideas about corporations and their relationship with their shareholders.6 They show that in some contexts the existence of the corporation as a separate legal person is taken very seriously indeed, both in law and common sense. Thus, not only were Railtrack’s shareholders not held legally liable for the company’s appalling safety record, nobody seems to have considered them morally responsible either. The same was true of the shareholders of the banks involved in the financial crash and the shareholders of BP after Deepwater Horizon. Few considered them morally, let alone legally, responsible for the damage caused by, or debts of, the corporations concerned, and the shareholders themselves showed no signs of remorse or guilt—it was ‘the company’, a completely separate (property-owning) legal person, that was responsible, not them. In the Railtrack case this sense of separation was manifested in the fact that while Railtrack’s shareholders expended a lot of time, energy and money trying to remedy what they saw as the theft of their property, they did nothing to address the company’s dreadful safety record. Indeed, in blogs they made it clear that they thought this nothing to do with them (boards.fool.co.uk), and in court their lawyer explicitly argued that they were in no way responsible for what he called ‘the sins of the company’ (Commons Standard Library Note, 2010). On the other hand, the cases also show that in other contexts the existence of the company as a separate legal person is largely ignored. Thus, the shareholders themselves and many media commentators clearly saw Railtrack as an object of property owned by its shareholders, hence the belief that the shareholders had been robbed and the idea, embedded in legal thought, that as

6  In this article the term ‘corporation’ is generally used, as it is in everyday usage, to refer to p ­ ublicly quoted companies. The schizophrenia alluded to here is rather different from that alluded to by ­William Allen (1992) 261.

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‘things’ owned by their shareholders, corporations should be run in their interest as a ­matter of simple property right. In these contexts, far from being regarded as ‘completely separate’, large corporations and their shareholders are treated as more or less synonymous (Gower and Davies, 2012: 35–38; Parkinson, 1993: 74–92). As a result of this corporate schizophrenia, shareholders are able to assert, in a manner which is generally seen as perfectly appropriate and legitimate, ‘ownership’ claims over corporations which enable them to insist on the maximisation of their returns. At the same time they are seen as bearing, in a manner thought equally appropriate and legitimate, no responsibility for the wrongs committed and damage caused by these corporations. Moreover, there is a clear link between these schizophrenic ideas and the problem of corporate irresponsibility. As ­Railtrack’s CEO, Gerald Corbett, conceded in a radio interview shortly after the company’s Hatfield conviction, there was a tension between the shareholder interest and the company’s public service obligations. ‘The only way we can make profits’, he confessed, ‘is by not doing the things we should to make the railways better’ (Martin, 2009). He might of course have added, ‘and safer too’. In similar vein, the National Commission on the BP Deepwater Horizon Oil Spill concluded that the disaster was ultimately traceable to a string of decisions to ignore standard safety procedures to cut costs (National Commission on BP Deep Water Horizon Oil Spill, 2011). Some degree of mental splitting7 is, of course, inherent in the corporate legal form and the doctrine of separate corporate personality. But history suggests that corporate schizophrenia in the extreme form described above is a historical and legal product. Clues as to its institutional origins are to be found in an article written by Edward Warren, a Harvard Law Professor, in the 1920s. In a discussion of eighteenth and nineteenth century English joint stock companies (JSCs), ­Warren complained about the poor grammar of contemporary English judges and lawyers. What irked him was that they kept referring to incorporated companies as ‘theys’, as though were made up of their shareholders, and to the assets of those companies as though they belonged to those shareholders. They failed, in other words, to recognise the existence of the corporation as a separate property-owning entity, as an ‘it’ (Warren, 1923). Warren was right: eighteenth and nineteenth century English judges and lawyers did refer to JSCs as ‘theys’ as if they were composed of shareholders. He was, however, wrong to suggest that this practice was confined to the English—their US counterparts did likewise8—and equally wrong to suggest that these practices were the result of poor grammar or conceptual error. Warren clearly thought the act of incorporation always created a property-owning corporate entity which

7  The term ‘schizophrenie’, derived from the Greek ‘skhizein’ (to split) and ‘phreno’ (mind), was coined in 1910 by Swiss psychiatrist Eugen Bleuler. 8  In the early nineteenth century, American judges also ‘frequently refer[red] to corporations as “theys” rather than its’: see EM Dodd (1954) 66. This has been confirmed by Naomi Lamoreaux (2004) 29.

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was radically separate from its shareholders. History makes it clear, however, that the perceived nature of incorporated companies and their relationship with their shareholders changed during the course of the nineteenth century. Put simply, there was a move from a conception of corporations as their shareholders merged into a single, legally distinct body—as personified legal persons, separate entities made up of their flesh-and-blood members (and therefore ‘theys’)—to a ­conception of them as de-personified legal persons, reified ‘things’, ‘its’, cleansed of shareholders. It was only in the mid-late nineteenth and early-twentieth centuries that this de-personified conception of the corporate entity began to crystallise and references to corporations with singular verbs and nouns ‘[came] to dominate, and the plural constructions that typified the first half of the century gradually ­disappear[ed]’ (Lamoreaux, 2004: 44–45). The question is: what underlay this shift?

IV.  Company Law and the Joint Stock Company Pointers to the answer are to be found in one of the differences between the UK and the US: what in the UK is called ‘company law’ is referred to as ‘corporate law’ in the US. Nowadays, this difference is treated as of little consequence: the subject matters of company law and corporate law are basically the same. But its historical origins are revealing. Both ‘corporate law’ and ‘company law’ were nineteenth century constructs, the first books on which were published in the 1830s: Joseph Angell and Samuel Ames’ The Law of Private Corporations Aggregate appeared in 1832, followed in 1836 by Charles Wordsworth’s The Law Relating to Railway, Bank, Insurance, Mining and Other Joint Stock Companies (Angell and Ames, 1832; Wordsworth, 1836). But they were rather different in orientation and approach. Like both corporate law and company law texts today, Angell and Ames’ treatise was organised around the corporate legal form, embracing all associations with corporate status. Nowadays, of course, this means businesses of all economic types, from large multinationals to medium-sized firms to small corner shops, all of which can (and do) become incorporated companies. In the eighteenth and for much of the nineteenth century, however, the term ‘company’ was an abridgement of ‘joint stock company’ and, as the title of Wordsworth’s book suggests, ‘company law’ (such as it was) was an abridgement of ‘joint stock company law’. Crucially, in eighteenth and early nineteenth century Britain some JSCs were incorporated, but many were not: JSCs were defined not by reference to their legal status but by reference to their economic natures. Organised around the JSC economic form rather than the corporate legal form, Wordsworth’s book encompassed all JSCs regardless of their legal status.9 9 The same was essentially true of American ‘corporate law’, though the situation was more c­ omplicated because capital shortages meant individual states were more willing to grant corporate privileges to facilitate the formation of firms that would foster development. However, the link between incorporation and JSCs remained: see Angell and Ames (1832) v–vi.

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Adam Smith described the key characteristics of the ideally typical JSC in Wealth of Nations when he distinguished the JSC from the ‘private co-partnery’.10 The ideally-typical private co-partnery or partnership was based around a small number of closely-related individuals who were active participants in the firm. In law, this was reflected in the principles of mutual agency (whereby partners could bind one another), joint asset ownership (whereby partners were joint owners of the partnership property), and joint and several unlimited liability. For inactive ‘investors’ who opted to become partners rather than creditors in search of returns better than those available from government debt and usury-capped loans, legal principles like unlimited liability were a problem. But the prevailing view was that by ensuring that partners were active and alert, and success rewarded and failure punished, unlimited liability not only accorded with the natural principles of justice and ‘the market’ but operated in the public interest by ensuring that firms were run efficiently. The ‘partnership system of commerce’ was widely regarded as the foundation of British economic success (Ireland, 2010). By contrast, JSCs were based around a capital fund and had many more members, most of whom were inactive, their interest in the firm being largely, if not wholly, financial. The ‘proprietors’ of JSCs, Smith wrote, ‘seldom pretend to understand anything of the business of the company; … and give themselves no trouble about it, but receive contentedly such half yearly dividend or yearly dividend as the directors think proper to make to them’ (Smith, 1776, 741). As this suggests, JSCs were the precursors of today’s large corporations and vehicles not only for productive activity, but for rentier investment. It followed that JSCs were characterised by a separation of ownership and management, and by (more or less) freely transferable shares. Indeed, it was the size, nature and changing character of their memberships that made the possession by JSCs of corporate privileges so desirable. It also, Smith argued, rendered them inherently less efficient than owner-managed firms. Populated by passive, rentier shareholders and led by directors managing ‘other people’s money’, JSCs were likely to be characterised by ‘negligence and profusion’. He concluded nevertheless that there were certain circumstances in which facilitating JSC formation was in the public interest. Thus, JSCs should be granted ‘exemptions from the general law’ (like limited liability) where the capital required was beyond the capacity of a private partnership; where the risks were unusually great; where there was an identifiable public benefit; and where the operations of the business could be reduced to a routine (Smith, 1776: 757–58). Smith’s ideas about the legitimate scope of the JSC shaped state policy and ­public opinion well into the nineteenth century with the result that throughout this period corporate privileges were granted sparingly, forcing many JSCs

10  Adam Smith (1776, 1982 edn) Vol II, 731–58. The section on JSCs appeared in the 3rd edn, ­published in 1784.

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to operate as unincorporated concerns.11 The story was very different in the US, where states granted corporate privileges much more readily, hence the different approaches and scopes of the Angell and Ames and Wordsworth books. It is nevertheless clear that even in the UK JSCs were from their inception associated with corporate status and privileges, even if not all JSCs were able to secure them. When incorporation and limited liability were made freely available, in 1844 and 1855 respectively, the link became even stronger, for thereafter nearly all JSCs were legally obliged to incorporate. As a result, in the business context, the JSC and the corporate legal form became more or less co-extensive. It was only towards the end of the century and the rise of the ‘private’ company that the link was broken. Thereafter, ‘company law’ came to encompass not only JSCs but all incorporated firms, irrespective of their economic natures.

V.  Accommodating the Rentier In empirical reality, at this time the line between the private partnership and the JSC was fuzzy. A lot of firms emerged with relatively large memberships, some degree of separation of ownership and management, and transferable shares. Some were incorporated, others not. But many of these firms were more in the nature of ‘extended partnerships’ than ‘pure’ JSCs, their shareholders often having more than a purely financial interest and involvement in the enterprise (Freeman, Pearson and Taylor, 2012). Indeed, even if they aspired to be pure money capitalists, members of these firms were hampered by the legal restrictions on share transfers, the absence of a developed share market, and by the legal conceptualisation of shares in both incorporated and unincorporated companies as equitable interests in the company’s assets. Moreover, shares at this time were rarely fully paid up and the resulting residual liabilities created ties between both shareholders and companies, and between shareholders inter se.12 These material realities were reflected in the tendency, which continued well into the nineteenth century, to treat shareholders as ‘partners’ and to treat JSCs, incorporated as well as unincorporated, as types of partnership. In the jargon of the day, JSCs were ‘public’, rather than ‘private’, partnerships. As a result, it was regarded as more or less ­axiomatic that all joint stock companies were governed by the general law of partnership except in the important respects in which, in the case of incorporated firms, the latter had been ‘superceded’ or ‘limited and restrained’ by the instrument 11  As late as 1840 one finds a series of leading articles in The Times denigrating JSC shareholders as wanting to ‘make money in idleness’ and arguing that JSCs were ‘inconsistent with the solid and proper principles of trade’ and partnership’: 9 October 1840; 22 October 1840. There was, the paper added, ‘only one more quality wanting to make the morsel wholesome as well as tempting’ to the idle rentier— limited liability: see James Taylor (2006). 12  With shares only partly paid up, there were good reasons for shareholders to be concerned about the financial wherewithal of their fellow members.

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of ­incorporation. Another result, noted by Warren, was that JSCs were seen, like partnerships, as aggregates of individuals—as ‘theys’. Even when a JSC acquired corporate status, the separate corporate entity was still seen as composed of people—as a personified legal person (Ireland, 1996; Wordsworth, at 35, 64, ­101–04). In these circumstances, the sense of ‘complete separation’ from the ­company felt by Railtrack’s shareholders was simply not possible. The second half of the nineteenth century, however, saw the emergence of much ‘purer’ JSCs and much ‘purer’ money capitalist shareholding, a development driven by the rise of railway companies which needed to raise huge amounts of capital by contemporary standards. The result was the appearance of companies populated by thousands (rather than tens or hundreds) of pure rentier investors and the emergence for the first time of a developed share market. This changed the character of the JSC and JSC shareholding and prompted a series of modifications to the law of partnership as it was applied to JSCs, the cumulative effect of which was to accommodate and offer protection to shareholders (Ireland, 2003). In Robert Flannigan’s words, a ‘sustained effort’ was made ‘to design … arrangements that exposed passive investors to something less than the general liability of principals’ (Flannigan, 2009: 146–47). The legislative changes, and in particular the introduction of incorporation by registration and general limited liability, are well-known. However, a series of judicial changes were also made to the law of partnership as it applied to JSCs: the partnership doctrine of mutual agency was abandoned and the doctrine of ultra vires was reformulated, for example (Ireland, 2003). In this context it is not, perhaps, insignificant that more and more of the law-makers, legislative and judicial, were themselves becoming members of the shareholding class. One of the key judicial changes was the radical re-conceptualisation of the nature of the JSC share. From the 1830s, the courts began to treat shares not as interests (legal or equitable) in the assets of companies but as intangible rights to profit; and to treat shareholders not as asset-owners but as money-providers. Shareholders in both incorporated and unincorporated companies came to be seen, in the manner of creditors, as transferring ownership of their money to a company, which then invested it in assets which it (‘the company’) wholly (legally and equitably) owned (Bligh v Brent (1836)). Henceforth there were two quite separate forms of property: the assets owned by ‘the company’ (incorporated or not) and the shares (rights to profit) owned by the shareholders. In this way, all JSCs, incorporated and unincorporated (Watson v Spratley (1854)) came to be seen as property-owning entities quite separate from their share-owning shareholders. This was exemplified by a change of wording in the 1856 and 1862 (Joint-Stock) Companies Acts. Whereas the 1856 Act permitted seven or more shareholders to ‘form themselves into a company’, the 1862 Act permitted them to ‘form a company’, suggesting that the latter was an entity made by, but not of, them. This was an important step in the gradual shift from a conception of the JSC as a legal person composed of its shareholders to a conception of the JSC as a reified entity cleansed of and external to them (Ireland, 2010: 846).

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As part of these processes, shareholders—increasingly seen not as active ‘partners’ but as passive ‘investors’—gradually handed over many of the rights and obligations traditionally associated with ownership to directors and managers. The introduction of limited liability had, of course, made this much less risky. By the end of the century, the risks had been further diminished as high denomination, partly paid-up shares which put the personal assets of shareholders at risk were replaced by lower denomination, fully paid-up shares. De jure limited liability thus became de facto no-liability. With the residual liabilities attached to JSC shares all but eliminated, the remaining connections between companies and their shareholders, and between shareholders and third party creditors, were severed. This completed the separation of shareholders from companies, paving the way for the full reification of the company and emergence of the doctrine of separate corporate personality in its modern form. The institutional foundations of corporate irresponsibility were now in place. Fully paid-up shares have enabled shareholders to detach from the companies in which they hold shares with minimal risk. Not only do they no longer perform managerial functions, they are no longer burdened with residual liabilities. All they ever stand to lose is the money spent on their shares and they have, of course, m ­ itigated this risk by delegating management of their money (as well as management of the company) to others and by diversifying their investments. In this context, the complete detachment felt by Railtrack’s shareholders from the company—at least in the context of liability for the company’s debts and responsibility for its safety record—is perfectly understandable. Although they have been relieved of responsibility and liability, however, shareholders have retained certain key proprietary rights, most notably the power to dismiss directors. Shareholder retention of these crucial residual control rights, together with the emergence of the conception of the company as a de-personified, reified ‘thing’ (an ‘it’), underpins the idea—part of our common sense, as the Railtrack cases vividly illustrate— that the company is an object of property ‘owned’ by its shareholders.

VI.  The Janus-faced Shareholder: Owner or Creditor? Corporate shareholding is, then, a very odd legal phenomenon. Shareholders have acquired a ‘novel status’ (Flannigan, 2014: 6) in which they are simultaneously ‘insider-owners’ with residual proprietary rights, able to elect and dismiss directors and insist that the company is run in their exclusive interests; and ‘outsiders’ who, like creditors, have transferred ownership of their property to this separate legal entity and become responsibility- and liability-free. The Janus-faced nature of corporate shareholding is reflected in the difficulty company lawyers have capturing the legal nature of the share. One of the most oft-cited definitions, that of Farwell J in Borland’s Trustee v Steel Bros & Co Ltd, sought to encompass both the proprietary and contractual dimensions of the

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share, describing it as ‘the interest of a shareholder in the company measured by a sum of money, for the purpose of liability in the first place, and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders inter se’. This foregrounds the contractual dimensions (‘liability’, ‘covenant’) of shares while noting their proprietary dimension (‘interest’). In similar vein, for Robert Pennington shares ‘are simply bundles of contractual and statutory rights which the shareholder has against the company’. Pennington is aware that this suggests that the relationship between shareholders and companies ‘is that of creditor and debtor’, but assures us that this is ‘quite wrong’. Being transferable, he says, the contractual rights which make up the share are of ‘a peculiar nature’, which has led to them being called property. Discomforted by this, but not wanting to dismiss it out of hand, Pennington says this view is ‘innocuous enough, provided that it is remembered that they do not comprise any proprietary interest in the company’s assets’. Pennington concludes that shares are ‘a species of intangible movable property which comprise a collection of rights and obligations relating to an interest in a company of an economic and proprietary character, but not constituting a debt’. This covers all the bases but is about as clear as mud ­(Pennington, 1995: 56–57 and 135–36; Pennington, 1989). Others, struggling with the same problem, have placed much greater emphasis on the proprietary qualities of shares. Gower, for example, thought Farwell’s definition laid ‘disproportionate stress on the contractual nature of the shareholder’s rights’ and sought to highlight Farwell’s claim that the shareholder has an ‘interest in the company’, arguing that this underlined the ‘insider’ status of shareholders by constituting them as ‘members of the company’. Gower recognised that it was ‘tempting to equate shares with rights under a contract’, but insisted that a share was ‘something far more than a mere contractual right in personam’. It might not be possible to classify ‘the rights which a share confers on its holder … as “proprietary” in the usual sense’, but it was clear that ‘the share itself is an object of dominion, ie of rights in rem and not so to regard it would be barren and academic in the extreme’. For all practical purposes shares are recognised in law, as well as in fact, ‘as objects of property which are bought, sold, mortgaged and bequeathed.’ Gower knew, however, that this mixing of rights in rem with rights in personam didn’t make it easy to specify the precise nature of this proprietary interest: ‘The theory’, Gower argued, ‘seems to be that the contract constituted by the articles of association defines the nature of the rights, which, however, are not purely personal rights but instead confer some sort of proprietary interest in the company though not in its property’ (Gower, 1979: 299–301 and 400 (emphasis added)). This view was recently endorsed by Lord Miller. ‘It is customary’, he argued, ‘to describe [a share] as “bundle of rights and liabilities” and this is probably the nearest one can get to its character, provided that it is appreciated that it is more than a bundle of contractual rights … These rights … are not purely personal rights. They confer proprietary rights in the company though not in its property’ (HM Commissioners of Inland Revenue v Laird Group plc [2003] UKHL 54 at paragraph 35 (emphasis added)).

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The Janus-faced nature of shareholding lies at the heart of contemporary corporate irresponsibility. Shareholders have been relieved, like creditors, of responsibility for corporate wrongs and debts, but permitted to retain residual proprietary rights which enable them to ensure that corporations are run in their exclusive interests. They are able, therefore, to draw revenues without actually doing anything and to insist on the maximisation of those revenues without having to worry about how they are generated, safe in the knowledge that, like creditors, they will be held neither legally liable nor morally responsible for corporate debts and m ­ isdemeanours. As Harry Glasbeek says, ‘corporate shareholders have little ­financial or other incentive to ensure that managers behave legally, ethically or decently … Because in law they are personally untouchable …’ (Glasbeek, 2002: 129; see also Bakan, 2004). This was, of course, only too evident in the Railtrack cases.

VII.  The Corporate Revolution: Towards Socialisation or Financialisation? Corporate social irresponsibility was not, however, the inevitable outcome of the rise of the JSC and passive rentier shareholding. As many late nineteenth and early twentieth century commentators recognised, the corporate revolution was double-edged, containing within it two very different possible futures. The first, rooted in the residual proprietary rights attached to shares, involved the emergence of increasingly ‘financialised’ corporations and an increasingly ‘financialised’ capitalism. The second, rooted in the increasingly creditor-like nature of shareholding, involved the emergence of less profit-oriented and more ‘socialised’ corporations and an increasingly ‘socialised’ capitalism. Historically, we have at different times headed in both directions. These alternative futures figured in the work of writers as diverse as Marx, ­Hilferding, Veblen, Lippmann, Tawney, Laski and Keynes. Marx, for example, saw the rise of the JSC as a potentially ‘progressive’ development which was evidence of the way in which advancing technology was causing business enterprises to assume the form of ‘social’ rather than ‘private undertakings’. The rise of the JSC, he argued, marked the beginning of the supersession of the means of production as private property and the ‘abolition of capital as private property within the framework of capitalist production itself ’. Echoing Smith, Marx also recognised the diminution of the shareholder to something resembling a creditor, observing that in JSCs the ‘actually functioning capitalist’ was transformed into ‘a mere manager, administrator of other people’s capital’, while the ‘owners of capital’ were transformed into ‘mere money capitalists’ who received their rewards in the form of interest, ‘as mere compensation for owning capital that now is entirely divorced from function in the actual process of production’. JSCs thus entailed ‘private

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production without the control of private property’. Moreover, with shareholders redundant, there was no reason why management functions couldn’t be delegated to workers managing their own firms. This led Marx explicitly to link the growing number of JSCs to the rise of the co-operative movement ‘The capitalist stock companies’, he wrote, ‘as much as the co-operative factories, should be considered as transitional forms from the capitalist mode of production to socialism’ whereby capital would be ‘reconverted’ into the property of associated producers, ‘outright social property’. The only distinction was that ‘the antagonism is resolved negatively in the one and positively in the other’. On the other hand, Marx also recognised that one of the immediate effects of these developments had been an ‘enormous centralization’ of money capital in banks in their ‘capacity of representatives of all money lenders’. These institutions had become ‘the general managers of money-capital’, the representatives of ‘capital in general’. This, he observed, had created a ‘financial oligarchy’, a ‘new financial aristocracy’ with ‘money power’. Moreover, because their value inevitably involved speculations about the future, JSC shares encouraged gambling. The rise of the JSC had thus been accompanied by the development of a ‘whole system of swindling and cheating’, centring on ‘corporation promotion, stock issuance, and stock speculation’. This new ‘class of parasites’ had ‘the fabulous power not only to periodically despoil industrial capitalists, but also to interfere in production in a most dangerous manner’ (Marx, Capital III: chapters 23, 25, 27). For Marx, then, while the rise of the credit system and JSC were potentially steps on road to socialisation, their immediate effect had been productively dysfunctional ‘financialisation’. A number of later commentators also recognised the double-edged nature of the rise of the corporate economy. Rudolf Hilferding, for example, noted the reduction of the shareholder to something resembling a creditor (shares, he said, represented ‘creditor’s claims on future production’) and argued that the rise of the JSC and of ‘finance capital’ was ‘establish[ing] social control of production’ and ‘socialize[d] production’. The problem was that they represented an ‘antagonistic’ or ‘fraudulent’ form of socialisation in which the control of production ‘remain[ed] vested in an oligarchy’. Hilferding nevertheless saw this as progressive, for it had ‘facilitate[d] enormously the task of overcoming capitalism’: taking possession of ‘six large Berlin banks’ would now enable one to take control of the most important spheres of industry. The key was ‘the struggle to dispossess this oligarchy’ (Hilferding, 1909, (2007): 110–11, 367–68). Although written in a very different idiom, similar themes ran through the work of the American political commentator, Walter Lippmann. He too placed great emphasis on the creditorlike nature of corporate shareholding. ‘In theory’, he wrote, the stockholder was one of the corporation’s ‘owners’, but the modern shareholder was a ‘very feeble representative of the institution of private property’, having no productive role to play and no responsibilities to discharge: the ‘one qualification’ was the ‘possession of some money and the desire for more’. ‘Deprived of their property rights’, shareholders had become ‘transient’ ‘absentee owners’, who flitted like ‘butterfl[ies] from industry to industry’ with their liquid, mobile capital. It was unrealistic to

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expect a ‘high sense of social responsibility’ from them. Lippmann went further, however, arguing that socialisation was already becoming a reality. There had been a discernible ‘change in business motives’ and a ‘revolution in business incentives’. Business and management were becoming ‘professions’ akin to medicine, law and engineering in which ‘motives other than profit came into play’. It was true that ‘control ha[d] passed for the time being into the hands of investment experts, the banking interests’, but this was already being challenged—not by the ‘decadent stockholders’ but by ‘those most interested in the methods of industry: the ­consumer, the worker and the citizen at large’(Leuchtenberg, ‘Introduction’ in Lipmann, 1914 (1985) (emphasis added)). Not everyone, however, was as confident that financial domination was a ­temporary stop on the road to socialisation. The American economist and sociologist Thorstein Veblen could see the progressive potential of the rise of the large corporation. It rendered, he argued, the idea of individual property rights in the means of production hopelessly outdated: modern technology not only made a more ‘socialised’ economy possible, it demanded it. But it had also seen ‘industry’, the technical processes concerned with the efficient production of useful goods, fall under the control of ‘business’—by which Veblen meant ‘parasitic’ financial interests more concerned with making money than things. As a result industrial processes were being managed to secure pecuniary gains for the owners of financial property rather than to enhance productive efficiency (Veblen, 1905: 77–78, 80). The ‘financial community’, Veblen argued, had taken over ownership of the country’s largest corporations and thereby gained control of ‘the usufruct of [its] industrial system’ (Veblen, 1923: 231–32). Crucially, the financial interests of ‘absentee’ shareholder-owners often obstructed productive activity and conspired against the full use of the ‘industrial arts’, for larger profits were often to be had from financial manipulation and obstructing production. Having little faith in class struggle as a way of realising the possibilities inherent in modern industry and technology, Veblen struggled to see how these vested financial interests might be overcome.

A.  Towards Socialised Corporations? Over the course of the following century the double-edged nature of the ‘corporate revolution’ repeatedly surfaced, finding expression in the continuing debates about the nature of the corporation and the changing trajectories of corporate governance. In simple terms, a period of intensely financialised governance at the end of the nineteenth and beginning of the twentieth centuries—‘the first financial hegemony’ (Dumenil and Levy, 2004)—was followed by a period of increasingly socialised governance. This has in turn been followed in recent decades by the return of financialised governance and a highly financialised, neoliberal capitalism.

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Claims that corporations were being socialised began to surface early in the twentieth century. They were rooted in beliefs about the growing dispersal and disempowerment of shareholders and growing power of professionalised and increasingly beneficent managers. As we have seen, Walter Lippmann was making claims about the changing motivations of business managers as early as 1914. Keynes made similar claims a few years later. There was, he argued, an inevitable tendency for ‘joint stock institutions, when they [had] reached a certain age and size, to approximate to the status of public corporations rather than that of individualistic private enterprise’. Big business tended to ‘socialise itself ’ when ‘the owners of the capital’, meaning shareholders, became ‘almost entirely disassociated from the management’. At this point managers became more concerned with stability and reputation than with profit maximisation, and shareholders had to satisfy themselves with ‘conventionally adequate dividends’. It was on this basis that Keynes dismissed the need for nationalisation. ‘The battle of socialism against unlimited private profit’, he argued, was ‘being won in detail, hour by hour’ from within these large enterprises (Keynes, 1926). Similar ideas surfaced again in the early 1930s in the celebrated debate between Merrick Dodd and Adolf Berle. Dodd argued that the great majority of corporate shareholders bore little resemblance to traditional owners and that corporations increasingly resembled social institutions. Directors not only should be required to take account of the interests of employees, consumers, creditors and society as a whole as well as of shareholders, they were doing so as a matter of fact. This, he suggested, was perfectly defensible if you took seriously the existence of the corporation as a separate legal person (Dodd, 1932). By this time, the likening of shareholders to creditors was becoming increasingly common, figuring prominently in the work of RH Tawney and Harold Laski in the UK (Tawney, 1920; Laski, 1925), and the work of Thorstein Veblen in the US. It also appeared in Berle and Means’ The Modern Corporation and Private Property. Berle and Means recognised that the character of the shareholder and the corporation had radically changed. The rise of the modern corporation, they argued, had ‘dissolved the [private] property atom’ in which possession and control were united. There were now two forms of property: one active, the tangible assets owned by the corporation and controlled by the managers; the other passive, the intangible revenue rights, ‘liquid, impersonal, and involving no responsibility’, owned by the shareholders. With shareholders now ‘not dissimilar in kind from bondholders or lenders of money’, it was no longer appropriate to view them as ‘owners’ of the corporation. This raised crucial ‘legal, economic and social questions’, the ‘greatest’ of which was ‘in whose interests should the great quasi-public corporations … be operated?’ The answer they seemed to favour involved recognising that shareholders had ‘surrendered the right that the corporation should be operated in their sole interest’ and ‘released the community from the obligation to protect them to the full extent implied in the doctrine of strict property rights’. The community was now entitled ‘to demand that the modern corporation

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serve … all society’ and that various groups be ‘assign[ed] … a portion of the income stream on the basis of public policy rather than private cupidity’; shareholders should get only ‘a fair return’ on their capital. It followed that the idea of the corporation as a private enterprise should be replaced by a ‘new concept of the corporation’ as a social institution (Berle and Means, 1932, especially Book IV). It was only because we didn’t yet have the institutional know-how to impose this broader ‘scheme of responsibilities’ on managers that Berle, contra Dodd, supported shareholder primacy as the only currently available way of making managers accountable (Berle, 1932). By the 1950s, however, Berle was conceding that history had proved Dodd right: modern directors were acting not as pure profit-maximisers but as ‘administrators of a community system’ (Berle, 1954 (1955): 137). This belief was a central tenet of the of so-called ‘managerialist’ theories of the firm that emerged after the Second World War. Premised on the de facto disempowerment of corporate shareholders and growing autonomy of professional managers, managerialist ideas about the corporation underpinned the belief, prevalent during the halcyon years of social democracy, that capitalism was gradually and inexorably being socialised, notwithstanding the continued possession by shareholders of residual control rights. During this period proposals to change corporate rights structures to reflect these perceived new realities were commonplace. Thus some argued for an attenuation of the rights of shareholders and their formal relegation to the status of creditors (Goyder, 1961; Wedderburn, 1965); others argued for worker participation and industrial democracy. However, significant changes to corporate rights-­obligations structures did not materialise, in part because many on the left did not think them necessary. With organised labour strong, shareholders dispersed and weakened, controls on capital movements in place, finance seemed to have been tamed. Managers were not only in charge but subject to social controls and influences. The ‘managerial revolution’, it was thought, had ushered in socially responsible corporations and a new ‘softer’, socialised capitalism.

VIII.  Organised Money: Exploiting Shareholder Residual Proprietary Rights13 This, it turned out, was mistaken. With the residual proprietary rights attached to shares still intact, the landscape began to change once more. The bundle of rights and power possessed by shareholders was gradually enhanced by the relaxation of the rules regulating the free movement of capital (the demise of

13 ‘We know now that Government by organised money is just as dangerous as Government by organised mob’: Franklin Roosevelt when announcing the Second New Deal, cited in Bowman et al (2014).

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Bretton Woods) and the rise of global financial markets, by the modification of the rules on take-overs, by the emergence of new mechanisms of investor protection and by the waning power of organised labour. At the same time, the ownership of shares and other forms of financial property gradually re-concentrated in financial i­nstitutions—within which competition between portfolio managers subject to regular market-based performance evaluation has steadily grown. New types of financial institution, like hedge funds and private equity firms, also emerged. As a result shareholders, in their new institutional guises, have been increasingly able to use the residual proprietary rights attached to shares to (re)assert their power in and over corporations, shaping (and in some cases directing) the behaviour of executives. This power is exerted both directly in individual companies and indirectly on the corporate sector as a whole through financial markets. Indeed, the latter has rendered financial power ubiquitous. ‘Even the largest global firms’, writes Grahame Thompson, ‘can be stalked by activist investors—hunted by private equity or sovereign wealth funds seeking added shareholder value extraction … Few companies, however large or internationalised, are immune from the threat of takeover’ (Thomson, 2012; Ireland, 2016). This has propelled us back to a finance-capital-dominated world. The changes in managerial behaviour have not, however, been a matter only of externally-imposed market imperatives. Modern forms of executive remuneration aligning the interests of managers and shareholders have made the ruthless pursuit of ‘shareholder value’ very lucrative for executives: since the 1990s their pay has sky-rocketed. Financialisation has been further intensified by financial institutions seeking the rapid capital gains available from rising share values rather than steady revenue streams. The result has been the emergence of brutally shorttermist, financialised forms of governance which show little concern for the longterm productive health of corporations, let alone for the interests of employees, communities or the environment. Indeed, on occasions governance has descended into blatant looting and asset-stripping. The corporate legal form as currently constituted has made these forms of governance possible. The residual proprietary rights and creditors’ privileges attached to shares have enabled short-term financial gain to be ruthlessly pursued without regard to, and without any sense of responsibility for, the long-term health of firms, let alone the economic, social and environmental costs. Responsibility for dealing with any deleterious consequences (whether financial crises, railway accidents, lost jobs, lower wages, damaged communities, growing inequality or environmental degradation) has fallen on the state—states whose ability to raise taxes to deal with these ‘externalities’ has been undermined by these very modes of governance (Streeck, 2014). The great financial crash, in which the costs were socialised but not the guilty corporations, provided a stark illustration of this. In recent years the most extreme examples of financialised governance have been associated with Private Equity (PE) firms (Hauptmeier, 2015). Eileen Applebaum and Rosemary Batt’s comprehensive study of PE in the US makes it clear that the cases in which PE firms provide the investment and management

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expertise needed to help turn companies around or grow are exceptional. The norm is for PE firms, making extensive use of debt and leverage, to seek quick capital gains by engineering financial deteriorations in the balance sheets of companies to force through radical cost-cutting measures entailing job losses, greater precarity, cuts to pay and social benefits (like pensions), poorer working conditions, and so on (Applebaum and Batt, 2014).14 Not only do their activities frequently have negative impacts on the workforce (which is seen as disposable or substitutable) and on communities, they often damage the long-term productive health of enterprises without always delivering the claimed returns to the limited (as opposed to the general) partners.15 Crucially, although practices vary between countries and although these firms represent only a small proportion of the institutional market, the aggressive and highly financialised approach of Anglo-Saxon PE is not only spreading but has begun to influence the practices of corporations themselves. PE firms, argues Julie Froud, have acted as ‘pioneers who have developed and tested out forms of financial and workforce engineering that have increasingly been normalized by public corporations’ (such as the use of high levels of debt and tax arbitrage). There has, she says, been ‘a kind of convergence of behaviour of organized money’, through which the ‘cynical financialized behaviour’ of financial intermediaries has come to ‘play an increasingly important role in shaping economic activity and social life’ (Froud, 2015).

IX.  Defending Shareholder Residual Proprietary Rights The radical reassertion of the principle of shareholder primacy has, of course, been controversial, prompting in recent decades the development of new justifications which rely less on problematic assertions of shareholder corporate ownership and more on its alleged ‘efficiency’ benefits. Claims of this sort underpinned the nexus-of-contracts theories of the corporation which rose to prominence in the 1980s. These theories represent the academic apotheosis of corporate schizophrenia, in some contexts vigorously asserting the reality of the separate corporate person, in others conceptualising the corporation out of existence. Thus Frank Easterbrook and Daniel Fischel begin their well-known exposition of contractual

14  The bankruptcy rate of PE companies is far higher than that of public corporations: see interview with Applebaum and Batt: www.nakedcapitalism.com/2014/12/andrew-dittmer-eileen-appelbaumrosemary-batt-private-equity-really-works.html. 15  Though there is no doubt that the search by pension funds for higher yields has increased PE’s popularity In the US pension funds linked to unions have been significant investors in PE firms, as they seek higher returns that will secure the financial viability of pension and health-care funds. This is paradoxical given the impact of PE on workers (lower wages, fewer jobs, reduced welfare and pension benefits, union de-recognition, and so on).

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theory by curtly dismissing the idea of the corporation as a ‘legal fiction’, a matter of ‘convenience rather than reality’. With the corporation out of the way, ­nothing stands between the shareholders and the corporate assets and the directors, enabling them to depict corporate governance as a simple ‘agency problem’: how do you get agent-directors to act in the interests of shareholder-principals? On the other hand, when defending limited liability—which they describe as ‘perhaps the distinguishing feature of corporate law’—Easterbrook and Fischel are forced hastily to resurrect the (fictional) corporate entity. ‘Corporations’, they tell us, ‘do not have limited liability; they must pay all of their debts, just as anyone else must’ (Easterbrook and Fischel, 1991). The separate existence of the corporation is thus taken very seriously in one context, but completely ignored in another. The defenders of shareholder primacy are generally aware, however, that no matter how theoretically sophisticated, consequentialist defences of shareholder rights do not have quite the same persuasive power as defences based on notions of ownership. As a result, assertions of (or assumptions about) shareholder corporate ‘ownership’ persist not only in everyday consciousness, as the Railtrack cases show, but in the academic literature. Historically, the credibility of these assertions has been bolstered by the proliferation of private and subsidiary companies. As we have seen, the Companies Act 1844–62 and the corporate legal form were not designed for use by small firms not organised on a joint stock basis. ­However, the closing decades of the nineteenth century saw more and more such firms ­incorporate to get limited liability. Many doubted the legitimacy and legality of this practice but it was validated by the House of Lords in the celebrated case of Salomon v Salomon & Co Ltd. Most significant business enterprises were soon incorporating, whatever their economic natures (Salomon v Salomon & Co Ltd [1897] AC 22; Ireland, 1984), with the result that the radical conceptual separation of companies and shareholders, developed in the specific context of JSCs populated by large numbers of passive rentier shareholders, was extended to ‘private’ companies that were, in reality, nothing more than incorporated individual proprietorships and partnerships. Crucially, in these firms, there was usually a clear controlling individual or group operating much like an ‘owner’ in the traditional sense of the word, albeit, of course, with limited (or no) liability. Equally importantly, when corporate groups began to emerge the Salomon principle was formalistically extended to them. Today the economically most powerful firms are multinational enterprises composed of groups of companies connected through shareholding, each of which is regarded in law as a formally separate entity, although in most cases the organisation as a whole is co-ordinated by a single management team. The liability shields made possible by such groups has, of course, facilitated irresponsible behaviour. These enterprises can, for example, choose where to locate their activities and profits, pushing investment-seeking states into competing to create favourable legal, regulatory and tax environments (Robé, 2016). The existence of subsidiary companies of this sort has also fuelled the idea of shareholder ownership by creating companies where there is a controlling shareholder who looks and acts like an ‘owner’ in the traditional sense.

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Indeed, ownership claims loom large in defences of shareholder primacy in other ways too. With the growth in private pensions, share ownership has ceased to be the preserve of the wealthy and trickled down (indirectly) to ordinary people. This underpins arguments that share ownership has been ‘democratised’ and that shareholder primacy not only indirectly benefits us all by ensuring productive efficiency but directly benefits a growing number of us in our capacity as shareowners. However, although ownership of shares and other forms of financial property has indeed spread, it has also become increasingly concentrated amongst the very wealthy (Ireland, 2005). In the US since 1970, for example, the proportion of ‘wealth’ or ‘capital’ owned by the top 10 per cent has risen from just over 60 per cent to over 70 per cent, and the proportion owned by the top one per cent has risen from under 30 per cent to over 35 per cent. The levels of concentration are not quite as high in Europe but the pattern is similar. Income inequality has also increased, driven in part by the growth in ‘supersalaries’, the enormously high incomes going to corporate executives and the ‘supermanagers’ of ‘other people’s money’.16 The result has been the emergence of a politically powerful alliance between the very wealthy, the managers of their money, the executive managerial class, and what Jeffrey Winters has called the ‘agents of wealth defence’—the army of skilled professionals (lawyers, accountants and the like) employed by the wealthy to protect their incomes (Winters, 2011). This ‘new aristocracy of finance’ has been the real beneficiary of the vigorous reassertion of shareholder primacy and emergence of increasingly financialised corporate governance.

X.  Realising the Potential of the Corporation In recent years, interest in alternative business forms—alternative to the traditional, profit- and shareholder-oriented corporation—has been growing. And quite rightly so. The standard for-profit public corporation, as currently constituted, is not merely not serving society well, it is heavily implicated in the increasing dysfunctionality of contemporary financialised capitalism. In this context, experimentation with alternative, more socially responsible and sensitive, more environmentally-friendly, and more participatory and democratic organisational forms is urgently needed. At present, however, a significant proportion of society’s productive resources remain under the direct or indirect control of public corporations. Social transformation will, therefore, require not only experimentation with alternative, more ‘socialised’ organisational forms, but radical reform of the corporations whose activities dominate the economic landscape.

16  Thomas Piketty (2014) 315–35, 346–50. Piketty may have actually understated the levels of wealth and financial property concentration in the US: see Emmanuel Saez and Gabriel Zucman (2013).

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We should not be surprised by the growth of corporate social irresponsibility. As we have seen, the JSC was from its inception a vehicle not only for productive activity but for rentier investment, and the construction in the nineteenth century of the corporate legal form was shaped above all else by the needs and interests of rentier investors. One manifestation of this was the (re-)constitution of the share as a legal hybrid combining some of the residual ‘insider’ rights of owners with the ‘outsider’ privileges of creditors. This hybridity foreshadowed very different possible futures. Historically, in the US and the UK corporate governance has been shaped in significant part by the ability (or otherwise) of shareholders, in their many and changing guises, to utilise and exploit their residual proprietary rights to influence the behaviour of corporate executives. Put simply, when shareholders have been unable (or disinclined) to use their residual ownership rights in an effective manner, the ruthless logic of capital accumulation, with its lack of concern with social costs and consequences (‘externalities’), has been tempered (though not eliminated), making possible less shareholder-oriented, financiallydriven and socially damaging forms of governance. By contrast, when shareholders have been able and willing to assert their residual proprietary rights, the strict logic of capital has been re-imposed and governance become more ‘financialised’ and socially irresponsible. Given the nature of corporate shareholding, we should not be surprised that in the context of a corporate legal form which couples noliability (and no moral responsibility) shareholding with control rights, the reconcentration of shareholding in institutions, rise of increasingly open and global financial markets, and reassertion by shareholders of their residual proprietary rights have seen the emergence of radically re-financialised and socially irresponsible forms of governance. The financial crash of 2007–08 has seen the re-emergence of debates about the nature and purpose of the corporation and renewed questioning of the neoliberal corporate governance orthodoxies of the 1990s. Attacks on the idea of shareholder value, encapsulated academically by Lynn Stout’s The Shareholder Value Myth, extend to the business world, exemplified by Jack Welch’s assertion that it was ‘the dumbest idea in the world’.17 The ‘mess’ we have made of corporate governance, the Financial Times’ Martin Wolf recently argued, ‘has a name: it is shareholder value maximisation’ (Financial Times, 20 August 2014). These critiques do not, however, generally entail a rejection of shareholder primacy. On the contrary, their goal is usually to get managers to pursue shareholder value in a more ‘enlightened’ manner and to focus on long- rather than short-term financial returns. Many of the reform proposals that have emerged thus seek to get shareholders to act more like ‘proper’, active, committed ‘owners’, (often by re-empowering them with enhanced proprietorial rights) and to persuade managers to adopt the role of ‘stewards’. Thus Colin Mayer, implicitly recognising the problem of corporate

17  Welch is the former CEO of GE and was previously seen as one of shareholder value’s leading proponents.

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schizophrenia, seeks to supplement the traditional emphasis on ‘incentives, ownership and control’ with an emphasis on ‘obligations, responsibilities and commitment’, proposing inter alia that voting rights be withheld from shareholders until they have demonstrated their ‘ownership’ credentials and held their shares for a minimum period (Mayer, 2013: 6, 246–48). This underpins Mayer’s proposed solution of ‘trust companies’. What is missing here is recognition that the great majority of corporate shareholding is inherently passive and financially motivated, and that the increasing mediation of share ownership by institutions acting as the ‘general managers’ of ‘all lenders of money’ has intensified this financial focus. Trying to get no-liability, no-responsibility, rentier shareholders and their representatives to act more like owners is rather like trying to get cats to bark. Portfolio investment discourages not only shareholder involvement and responsibility, but careful monitoring of risk. It positively encourages financialisation. In this institutional context, reforms aimed at empowering and enhancing the proprietorial rights of rentier shareholders and at making them more active, whether in financial markets or in corporations, are, therefore, more likely to exacerbate the problem than to solve it (Robé, 2016; Talbot, 2013). Although proposals such as Mayer’s for time-dependent voting rights are, then, steps in the right direction and highlight the urgent need to reform corporate rights-obligation structures, it has to be questioned whether they go far enough. They don’t address the underlying problem: the Janus-faced, hybrid nature of corporate shareholding and the schizophrenic treatment of the corporation as ‘completely separate’ from its shareholders for some purposes and as an object of property ‘owned’ by them for others. As the Railtrack cases confirm, the ‘contractual right [of shareholders] to receive profit on a residual basis … along with rights to elect and remove directors … appears to suggest to some that shareholders remain the “real owners” of the business and therefore ought to enjoy that status whenever it suits their purposes’. It also ‘constitutes a direct rejection of the entity status of the corporation’, upon which, of course, in other (liability) contexts, shareholders rely (Flannigan, 2014: 10). With money capital increasingly concentrated in the hands of a small elite and managed by powerful financial institutions, this is a toxic mix. By mixing ‘insider’ with ‘outsider’ rights and combining no-liability rentier shareholding with control rights, our rights-obligations structures have become a recipe not only for shorttermist financialised governance, but for managerial excess, corporate rapacity and irresponsibility, for the increasing exploitation of labour by capital, and for growing inequality. The problem is not merely one of ‘commitment’—the members of RPSAG were long-term, committed shareholders—but of responsibility. There is, then, an urgent need to reconsider the Janus-faced, hybrid nature of corporate shareholding and to take separate corporate personhood seriously. This might enable us to tap the ‘yet unrealized potential of the corporation’ (Mayer, 2013: 241). Radical reform of corporate rights-obligations structures will require us to dispel the myth of shareholder ownership and the ideological and intellectual

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­ arriers to this are considerable. When Lynn Stout discussed her book recently, she b reported that ‘the interviewer simply couldn’t get his mind around [her] claim that shareholders aren’t really “owners”’.18 The political obstacles to reform are, of course, even greater. The enormous power and influence of the new financial oligarchy means that even modest reforms are likely to be vigorously resisted, as are the necessary shifts in understandings and consciousness. But there are some promising signs: the characterisation and treatment of shareholders as ‘owners’ is once again actively and widely being questioned, and worker participation is beginning to re-emerge as a live issue. In this more open intellectual environment, the historical development of the corporate legal form and some of the old debates are worth revisiting, for they not only force us to question the hybrid status of corporate shareholders— ‘owed’ or ‘owning’?19—but remind us just how contingent, complex and malleable are the institutions of property and ownership. The rights in the property bundle can be allocated and arranged in many different ways. Not everything has to be ‘owned’ in the full liberal sense; nor is it always better if they are. As Mayer says, ‘there is no natural order … we can create concepts and institutions to assist rather than subjugate us’ (Mayer, 2013: 255). The choice is not simply between private property and collective property (Unger, 2009). It is time we began to experiment with different rights-obligations structures and what Berle called new ‘schemes of responsibility’, and to address the problem of institutional know-how he identified all those years ago.

References Allen, W (1992) ‘Our Schizophrenic Concept of the Business Corporation’ 14 Cardozo Law Review 261. Angell, J and Ames, S (1832) Treatise on the Law of Private Corporations Aggregate 1st edn (Boston, Hilliard, Gray, Little & Watkins). Bakan, J (2004) The Corporation (Constable, 2004). Berle, A and Means, G (1932) The Modern Corporation and Private Property (New York, Macmillan), especially Book IV. Berle, A (1932) ‘For Whom Corporate Managers are Trustees’ 45 Harvard Law Review 1365. —— (1954, UK edition 1955) The Twentieth Century Capitalist Revolution (London, Macmillan). 18 www.thedeal.com/thedealeconomy/lynn-stouts-the-shareholder-value-myth.php. Although Mayer emphasises that companies are entities with a separate legal existence of their own, he still refers to corporate shareholders as ‘owners’: Mayer (2013) note 75, 22, 242. 19  https://themoderncorporation.wordpress.com/company-law-memo/ https://themoderncorporation.wordpress.com/economics-and-msv/.

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Bligh v Brent (1836), 2 Y&C Ex 268. Bowman et al (2014) What a Waste (Manchester, Manchester University Press,). Butcher, L (2010) ‘Railways: Railtrack administration and the private shareholders, 2001–05’, HC Standard Note SN/BT/1076, 10/8/2010. Commons Standard Library Note, SN 01076 (2010) ‘Railways: Railtrack administration and the private shareholders, 2001–2005’ (10/8/10): www. parliament.uk/business/publications/research/briefing-papers/SN01076/ railways-railtrack-administration-and-the-private-shareholders-20012005. Daily Telegraph, ‘The Bad Old Days’ 15 January 2002. Dakers, M (2015) Daily Telegraph, 30April 15: www.telegraph.co.uk/finance/ newsbysector/banksandfinance/11574454/Northern-Rock-shareholders-hitout-at-Milibands-inaction.html. Dennis Grainger and others v UK (Application No 34940/10). Dittmer, A (2014) Interview with Applebaum and Batt: www.nakedcapitalism. com/2014/12/andrew-dittmer-eileen-appelbaum-rosemary-batt-privateequity-really-works.html. Dodd, EM (1954) American Business Corporations until 1860 (Cambridge MA, Harvard University Press). Dumenil, G and Levy, D (2004) Capital Resurgent (Cambridge MA, Harvard University Press). Easterbrook, F and Fischel, D (1991) The Economic Structure of Corporate Law (Cambridge MA, Harvard University Press). Financial Times, 20 August 2014. Flannigan, R (2014) ‘Shareholder Fiduciary Accountability’ Journal of Business Law 1. —— (2009) ‘The Political Imposture of Passive Capital’ 9 Journal of Corporate Law Studies 139. Freeman, M, Pearson, R and Taylor, J (2012) Shareholder Democracies (Chicago, University of Chicago Press). Froud, J (2015) ‘Book Review’ 13 Socio-Economic Review 813. Glasbeek, H (2002) Wealth by Stealth (Toronto, Between the Lines). Gower and Davies (2012) Principles of Modern Company Law 9th edn (London, Sweet and Maxwell). Gower, LCB (1979) Principles of Modern Company Law 4th edn (London, Stevens and Sons). Goyder, G (1961) The Responsible Company (Oxford, Basil Blackwell). Gray, J (2009) ‘Northern Rock Shareholders’ Challenge to Basis of Compensation in Nationalisation Considered in High Court and Court of Appeal’ 17 Journal of Financial Regulation and Compliance 467. Hauptmeier, M (2015) ‘Book Review’ 13 Socio-Economic Review 816. Hilferding, R (1909, 2007 edn) Finance Capital (Abingdon, Routledge). HM Commissioners of Inland Revenue v Laird Group plc [2003] UKHL 54. http://boards.fool.co.uk/i-am-a-little-slow-this-morning-the-telegraph-9348450. aspx.

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http://boards.fool.co.uk/i-think-its-more-appropriate-to-note-that-the-8173639. aspx. http://boards.fool.co.uk/possible-amount-of-compensation-9347245. aspx?sort=whole. http://boards.fool.co.uk/railtrack-plc-v-railtrack-group-6956032.aspx?sort= whole. https://themoderncorporation.wordpress.com/company-law-memo/. https://themoderncorporation.wordpress.com/economics-and-msv/. Independent Investigation Board July (2006), Train Derailment at Hatfield: Final Report. Inman, P (2016) The Guardian 1 March 2016: www.theguardian.com/ business/2010/mar/30/northern-rock-shareholders-valuation. Ireland, P (1984) ‘The Rise of the Limited Liability Company’ 12 International Journal of the Sociology of Law 239. —— (1996) ‘Capitalism without the Capitalist’ 17 Journal of Legal History 40. —— (1999) ‘Company Law and the Myth of Shareholder Corporate Ownership’ 62 MLR 32. —— (2010) ‘Limited Liability, Shareholder Rights and the Problem of Corporate Irresponsibility’ 34 Cambridge Journal of Economics 837. —— (2003) ‘Property and Contract in Contemporary Corporate Theory’ 23 Legal Studies 453. —— (2005) ‘Shareholder Primacy and the Distribution of Wealth’ 68 MLR 49. —— (2016) ‘The Corporation and the New Aristocracy of Finance’, in J-P Robé, A Lyon-Caen and S Vernac (eds), Constitutionalization of the World-Power System (Abingdon, Routledge). Kay, K (1997) ‘The Stakeholder Corporation’, in G Kelly, A Kelly and A Gamble, Stakeholder Capitalism (London, Palgrave Macmillan). Keynes, JM (1926) The End of Laissez-Faire (London, Hogarth Press). Lamoreaux, N (2004) ‘Partnerships, Corporations and the Limits on Contractual Freedom in US History’ in K Lipartito and DB Sicilia, Constructing Corporate America (Oxford, Oxford University Press). Laski, H (1925) A Grammar of Politics (Crows Nest NSW, Allen & Unwin). Lippmann, W (1914, 1985) Drift and Mastery (Madison, University of Wisconsin Press). Martin, B (2010) ‘The High Public Price of Britain’s Private Railway’, Public World, November 2010. Marx, K (1987) Capital Volume III (London, Lawrence and Wishart) chapters 23, 25, 27. Mason, E (ed) (1959, 1973 edn) The Corporation in Modern Society (Cambridge MA, Harvard University Press). Mayer, C (2013) Firm Commitment (Oxford, Oxford University Press). Merrick Dodd, E (1932) ‘For Whom are Corporate Managers Trustees?” 45 Harvard Law Review 1147.

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Milward, D (2005) ‘Companies fined £13.5 Million for Hatfield Crash’, The Telegraph, 8 October 2005. National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling (2011) Deep Water: The Gulf Oil Disaster and the Future of Offshore Drilling (January 2011). Parkinson, J (1993) Corporate Power and Responsibility (Oxford, Oxford University Press). Pennington, R (1989) ‘Can Shares in Companies be Defined?’ 10 Company Lawyer 144. —— (1995) Company Law 7th edn (London, Butterworths). Piketty, T (2014) Capital in the Twenty First Century (Belknapp, Harvard University Press). Private Investor (2006) ‘Railtrack Shareholders—What kept us going’ Issue 109, Dec/Jan 2006, 3. Robé, J-P (2016) ‘Globalization and the Constitutionalization of the World-Power System’, in Robé, Lyon-Caen & Vernac (eds), Constitutionalization of the WorldPower System (Abingdon, Routledge). Saez, E, and Zucman, G (2014) The Distribution of US Wealth, Capital Income and Returns since 1913 (March, 2014) available at www.progressinpolitics.com/ images/uploads/misc/The_Distribution_of_U.S._Wealth,_Capital_Income_ and_Returns_since_1913.pdf. Salomon v Salomon & Co Ltd [1897] AC 22. Smith, A (1776, 1982 edn) Wealth of Nations (ed by Campbell, Skinner and Todd, Carmel IN, Liberty Fund). Stout, S (2012) The Shareholder Value Myth (Berrett-Koehler, San Francisco). Streeck, W (2014) Buying Time (London, Verso Books). Talbot, L (2013) ‘Why Shareholders Shouldn’t Vote’ 76 MLR 791. Tawney, RH (1920) The Acquisitive Society (London, Fontana Books (1961 edn)). Taylor, J (2006) Creating Capitalism (Woodbridge, Boydell and Brewer). Thomson, G (2012) The Constitutionalization of the Corporate Sphere (Oxford, Oxford University Press). Unger, R (2009) The Left Alternative (London, Verso). Veblen, T (1923) Absentee Ownership (New York, Huebsch). —— (1904) Theory of Business Enterprise (New York, Scribner). Warren, EH (1923) ‘Safeguarding the Creditors of Corporations’ 26 Harvard Law Review 509. Watson v Spratley (1854), 10 Ex 222. Wedderburn, KW (1965) Company Law Reform (London, Fabian Society). Weir and others v Secretary of State for Transport and another [2005] EWHC 2192 (Ch). Winters, J (2011) ‘Wealth Defence Industry’ www.alternet.org/story/154930/ wealth_defense_industry%3A_the_real_reason_america’s_oligarchs_can_ squeeze_the_rest_of_us.

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Wordsworth, C (1st edn 1836; 2nd edn 1837) The Law Relating to Railway, Bank, Insurance Mining, and Other Joint Stock Companies (Oxford, Butterworths). www.telegraph.co.uk/finance/newsbysector/banksandfinance/9445059/ European-court-rejects-Northern-Rock-shareholders-case.html. www.telegraph.co.uk/news/uknews/1519644/Fined-13m-but-Hatfield-rail-firmsgiven-21m-costs.html. www.thedeal.com/thedealeconomy/lynn-stouts-the-shareholder-valuemyth.php.

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2 Destruction by Ideological Pretence: The Case of Shareholder Primacy GORDON PEARSON

I. Introduction Tony Judt opened ‘Ill Fares the Land’, his valedictory ‘treatise on our present ­discontents’, suggesting that ‘[s]omething is profoundly wrong with the way we live today. For thirty years, we have made a virtue out of the pursuit of material self-interest’ (Judt, 2008: 1). The result is that we appear headed for destruction. At the very least we are approaching a tipping point, characterised by the waste of earth’s finite resources, unsustainable inequalities of wealth and income, both within and between economies, giving rise to unpredictable ‘social unrest’, continuing pollution of earth’s ecological and environmental systems, the first ever species-caused mass extinction (Pimm et al, 1995: 347–50) and climate change which appears to be fast approaching the point of irreversibility (Molina et al, 2014). All this in the context of an exploding global population from three ­billion in 1960 to over seven billion by 2012 and forecast to hit nine billion by 2050 (United Nations Population Division, 2008). The current generation, in its fleeting exercise of power, is on the cusp of ­decisions which will determine the welfare of all future generations, if not their survival. The problems and solutions are known and understood better than ever before. Technologies have been discovered and invented which make what previously seemed impossible, potentially attainable. But as a population, we seem to have accepted that decisions will be guided by an economic ideology which is incapable of taking account of all those frailties listed above. It therefore prescribes policies which lead to destruction. A different analysis needs to be made as a matter of some urgency. Business historian Alfred Chandler described business as ‘the most important institution in the American economy’ (Chandler, 1977: 1). That importance has only increased over the past four decades, and is true not just of America, but of all developed and developing economies. It is business which satisfies peoples’ desires,

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wants and most of their needs. It is business which might achieve a s­ ustainable future. But it is business that is destroying the Earth. The urgent needs of sustainable society are ignored by those with the power to respond. The leaders of business, finance and other critical areas of what Roosevelt referred to as ‘organised money’ (Roosevelt, 1936) achieve short term gains by adopting the free market ideology which only accelerates and multiplies the problems, rather than hastening their correction. The following sections outline aspects of the corporate landscape and how it is shaped by serving the interests of organised money. Some critique is provided of the economic ideology, notably including the commitment to shareholder p ­ rimacy. The economic theory which seeks to justify shareholder primacy is shown to be false, but though widely falsified as a theory, shareholder primacy remains as a belief system shaping human behaviour across the corporate landscape and beyond. A note is made of the legal ambiguity that has been introduced to legitimate shareholder primacy and so serve the interests of organised money. Escape from the rigid grip of shareholder primacy and the supporting economic belief system is essential if this generation is to fulfil its duty to bequeath a planet as viable as the one it inherited.

II.  The Corporate Landscape and Organised Money Since industrialisation, business has provided the means for resourcing our civilised society and has raised human standards of living far beyond what ever previously seemed imaginable (Maddison, 1982). The only explanation for such improvements is technological innovation (Baumol, 1986). Kondratiev (1935) and Schumpeter (1939) both identified surges of economic growth associated with waves of fundamental technological innovation driven by real business. Piatier identified three such waves. The third, still in process, is based primarily on computerised and web-based systems enabled by electronics and information technology in a newly globalised format (Piatier, 1984). Such innovation and change can be used for good or ill—‘criminals are among the most innovative people on the planet’ (Kaminska, 2017). The current wave of new technologies provide exciting new opportunities for sustainable achievement as well as fraud and crime. The corporate landscape has always harboured companies and individuals that have acted corruptly and dishonestly. That is no different from all other areas of human activity. However, the extent of that corruption and dishonesty appears to have increased over the past few decades. The financial sector has been described even by The Economist as now being mired in ‘a culture of c­ asual dishonesty’ (2012). That might be bad enough, but the extent of fraud and criminality which goes

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far beyond the financial sector, as indicated in the following observations, suggests a culture which is far more systemic and committed, rather than ‘casual’. In 2015, the Financial Times reported that ‘between 2009 and 2013 the 12 global bankers paid out £105.4bn worth of fines to European and US regulators for crimes ranging from mis-selling of mortgages, to rigging the Libor index of interbank lending rates’ (Tett, 2015). They had also been fined for rigging the Forex market, as well as rigging various commodity markets, also for money laundering on behalf of various terrorist organisations and for Mexican drug cartels, not to mention tax evasion and the most energetic avoidance. The Financial Times also reported that those 12 banks had made additional provisions in their accounts for a further £61.23 billion of anticipated fines for crimes which presumably they knew all about, but which had not yet been uncovered. This equals a total of £167 billion, which the Financial Times described as ‘eye popping’, at the same time pointing out that £167 billion was ‘unlikely to be the final hit.’ Not only was that £167 billion of fraud not the whole story for the 12 global banks, most financial houses appeared to have been behaving in similar fashion. Barclays investment bank had been found guilty of fixing the Libor market, on which around $350 trillion of derivatives depended, affecting pretty well all mortgages and overdrafts. As one of the traders was reported as saying ‘If you aint cheating, you aint trying!’ Barclays were fined £290 million for their wrongdoing and the investment bank boss was promoted to CEO of the whole group, rather than being asked to bear any personal responsibility. The real economy has become similarly mired (Pearson and Parker, 2016). ­Heffernan adopted the term ‘wilful blindness’ to describe one aspect of corporate management. It was a term originally suggested by the trial of Enron bosses, ­Skilling and Lay, to describe their behaviour, which while perhaps not originating with criminal intent, nevertheless wilfully ignored the responsibility to ensure criminal behaviour was not permitted on their watch. That is, so long as it appeared that shareholder interests were being served (Heffernan, 2011). Heffernan’s prime focus was on BP’s approach to the Texas City Refinery explosion in which 15 people died and 170 others were injured. An independent review concluded that the prime cause was a ‘lack of effective monitoring and modelling approaches that provide early warnings and help to prevent such events’ (Kalantarnia et al, 2010). Heffernan’s argument gained weight with the subsequent BP Deepwater Horizon catastrophe which killed a further 11 people and spilled millions of barrels of oil into the Gulf of Mexico, causing unprecedented levels of environmental damage. BP’s focus was clearly on its performance in terms of shareholder value—its blindness to other issues certainly appeared wilful. There is little practical difference between the dedicated professional fraudster and the legitimate business which strays across the borderline into criminal activity. That is so especially when the legitimate business commits frauds on an ‘eye popping’ scale. One difference is that those responsible for the

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legitimate c­orporation’s wrongdoing are rarely charged with any offence. The business s­ystem as now constituted appears supportive of the fraud and crime and the business paying fines seems to be regarded as an essential cost of doing business. Some of its global extent has been recently indicated by the leak of the Mossack Fonseca database of Panamanian tax haven activity (International Consortium of Investigative Journalists, 2016), which also suggests something of the extent to which the rich and powerful have been involved. Roosevelt said ‘Government by organised money is just as dangerous as ­Government by organised mob’ (Bowman et al, 2015). Organised money refers to those who control not just the real industrial economy, but also finance and the media, as well as being hugely influential in academia through their funding of research and academic institutions, especially business schools. They also clearly influence political decision-making through their multi-billion dollar funded lobbying industry, politically oriented think-tanks and operation of the revolving doors through which individuals progress between these various sectors and government (Vidal et al, 2010). Privatised public services are another part of the corporate landscape which is affected by the organised money establishment. Milton Friedman propounded ‘a sort of empirical generalization that it costs the state twice as much to do anything as it costs private enterprise’ (Friedman, 1977). No serious empirical support was offered for this contention, but nevertheless it was widely accepted and argued in support of privatisations across the range of public services. The ‘big four’ privatising conglomerates—G4S, Serco, Capita and Atos—lacked specialist knowledge and expertise related to the activities taken over, as indicated symbolically by G4S’s 2012 Olympic Games fiasco in London. Their expertise lay more in the bidding process to acquire contracts. Once acquired, costs could be quickly reduced simply by cutting jobs and wages, mindless of the longer term predictable outcomes (Bowman et al, 2015). The privatising companies are focused on serving the best short-term interests of their shareholders. A 2014 House of Commons Public Accounts Committee described the outsourcing industry as an ‘evolution of privately owned public monopolies, who largely, or in some cases, wholly, rely on taxpayers’ money for their income’. The outsourcing companies game the contractual system and taxation regimes to take out more and pay back less into the public purse (House of Commons Public Accounts Committee, 2013–14). A noteworthy side effect of the privatisation process is that the state reduces its resources and expertise to assess competently future outsourcing contract bids (King and Crewe, 2013). Such firms invest in developing sophisticated means of avoiding and evading taxation and share the financial sector’s willingness to act fraudulently in order to benefit shareholder returns (Corporate Reform Collective, 2014). The list of such cases is far too long for inclusion here (Shaxson, 2011). Business now appears so focused on maximising shareholder value, it avoids all other responsibilities. It does so at the cost to corporate well-being itself, as

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well as all other stakeholders, including the common good of future generations (Wilkinson and Pickett, 2009). That is the essence of what is meant by shareholder primacy. These are only fragments of the corporate landscape, but they indicate ­something of Judt’s profound wrong and the head-on clash of interests between corporate activity and the various needs of a sustainable future. That results not just from the greed of particular individuals, but more importantly, from various structural tendencies of the business system which are encouraged and exploited as outlined in the following section.

III.  Business Purpose, Evolution and Financialisation Business comes in all shapes and sizes: privately owned for profit, co-operatively owned and operated, community owned and run, as well as state owned for provision of public services. They are all businesses. They all need to be effective and efficient in their operation. The industries in which they are located are similarly various. Moreover, both businesses and industries, like all living systems, are constantly changing and evolving. New businesses may be started by the founding entrepreneur identifying some unsatisfied customer need or want. It might be different from what is already supplied, differentiated by its product or service characteristics, its quality or its price, made possible by some new technology. But as with all living systems, start-ups are dominated by the simple fact of high infant mortality. Though statistics vary, the vast majority of business start-ups perish within the first few years of existence. Consequently, the overwhelming aim of those involved in start-up businesses is simply to survive. The original purpose of the start-up business might be to provide a living for the proprietor entrepreneur, as with Adam Smith’s butcher, baker and brewer (Smith, 1776 (1993): 22). Other start-ups aim to grow into full scale operations, employing many people and with unlimited ambition for further development. A 2013 survey of 2500 start-up entrepreneurs across 13 countries, whose businesses were between two and 10 years old, identified a prime motivation for starting their business as ‘to make a difference’ (Harding, 2013). That difference was not simply focused on making money, but contributing something different from what had previously been available (Mayo, 2016: 25–27). To survive and make a difference, start-ups need to develop reliable relationships with customers, suppliers and employees and therefore need always to act with integrity (Pearson, 1995). Betrayal of trust at this early stage of business evolution will almost certainly result in its extinction. At each stage of the life cycle—start-up, growth, maturity, decline and death— businesses have different needs and necessarily focus on different objectives

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(Pearson, 1999). Having survived through that initial start-up stage, the adolescent business will seek to grow by developing the competitive positioning of its product or service. The growth phase sees the business develop beyond being the creature of the founding entrepreneur with a simple structure, to achieving the critical mass at which new professional specialists and technologies can be profitably supported and developed. These are the successful innovative small and medium sized enterprises (SMEs). The fundamental system aim is to achieve maturity, which is when systems are at their most powerful. Businesses achieve that stage by continuous improvement and innovation of product and processes to become increasingly efficient and effective at satisfying customer needs and wants. The successful SMEs as they grow to maturity generate their maximum surplus. As growth slows there is no longer the need for further investment in additional fixed and working capital to support growth. They are then naturally cash rich. However, with the end of the high growth phase, business management comes under extreme pressure nevertheless to maintain the progression of their business. The public rating of the business, as well as personal reputations, depend on profitable development being maintained. A new strategy is therefore needed to enable businesses to break out of the new post-growth situation. That is most easily achieved by merger and acquisition (M&A) either to establish monopolistic control of existing markets and/or by diversification and conglomeration into new markets. Anglo-America has led in this mutation from real business entities to ones focused on financial deal-making. That change also requires a reorientation of top management. Innovative SME management needs knowledge and expertise to focus on the long-term development of the business and its products, processes and technologies as well as its people, customers and markets. That is a demanding and creative, motivational role. The top management focus of a financialised deal-maker business, on the other hand, is on short-term financial results. That requires some basic understanding of finance and a willingness to risk ‘other people’s money’ on deals (Kay, 2015) in order ‘to make as much money as possible for the stockholder’ (Friedman, 1962: 133). The majority of big businesses follow that financialisation route. When governments claim ‘business friendly’ policies, they appear to envisage the fast-growth innovative SME. But their policies are actually advised by the leaders of the financialised deal-makers.1 Whole industries progress through the same life cycle phases. A new industry is generally started as a result of some new technology. A multitude of start-ups typically contribute a wide variety of approaches to application of the new t­ echnology.

1  eg David Cameron’s special advisory committee of 10 on economic strategy was mostly comprised of bankers, accountants and retailers (including Sir Philip Green, then of BHS), and only one manufacturer. See https://gordonpearson.co.uk/2010/09/21/limits-of-economic-advice-to-the-coalition/.

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Most will not survive the start-up phase, with only the more effective variations surviving through to the growth phase. During growth there is a continuing rationalisation of technologies until just a small number of options continue. When industry growth starts to falter, most of the less successful competitors are either taken over or closed down, leaving the mature phase of an industry, marked by continuing M&A, to becoming progressively more concentrated among ever fewer players. The natural end-state of such industry progression would be monopoly (Porter, 1980). That was previously prevented by adequately resourced regulation which has over the past few decades been progressively removed. Technologies, such as computerisation, the internet and globalisation of communications and transactions, have provided new opportunities for financial entities including trading intermediaries such as new start-ups based on potentially lucrative, low-cost ultra-fast trading (Fletcher, 2010). These automated algorithmbased systems deal on the basis of information some of which is fabricated for that very purpose.2 This sector of hedge funds, private equity and sovereign wealth fund financial intermediaries is populated by business school graduates who ­Ghoshal described as having been ‘freed from any sense of moral responsibility’ by their business school experience (Ghoshal, 2005). In summary, mature businesses tend naturally to become financialised, focused on the short-term extraction of value for the benefit of shareholders. Maturing industries tend naturally to become monopolistic, enabled to fix and abuse markets for the benefit of their shareholders. These appear to be natural systemic processes. They have been accelerated by the application of technology and encouraged by permissive deregulation of capital markets. The result has been the creation of a new and predatory financialised sector operating without moral restraint and with new opportunities for wrongdoing on behalf of the organised money establishment.

IV.  The Shareholder Primacy Belief System While shareholder primacy has already been referred to several times in this ­chapter, its intended usage has not been adequately clarified. Nor has its explanation in economic theory been identified. That is the purpose of this section. Shareholder primacy is used here as the capstone which locks the rest of a whole ideology in place. Its most simple and direct expression was by Milton Friedman: Few trends could so thoroughly undermine the very foundations of our free society than the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible (Friedman, 1962: 133).

2 eg as at The Gateway to Automated and Algorithmic Trading—www.automatedtrader.net/ algoworld.xhtm.

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It caps the neoclassical economic ideology, critically changing the focus on profit maximising to shareholder money maximising. The lack of valid theoretical and legal support for that crucial change is outlined below. Neoclassical theory is primarily an attempt to express mathematically the classical economics of Smith and Ricardo. It describes relationships between economic phenomena in terms of mathematical equations. But, unlike Smith’s observations of real world activity, mathematically expressed relationships are widely recognised as having limited relevance to the real world requiring a host of unworldly assumptions and abstractions to be logically consistent (Onyimadu, 2015). Keynes wrote about neoclassical economics that ‘its tacit assumptions are seldom or never satisfied, with the result that it cannot solve the economic problems of the actual world’ (Keynes, 1926: 378). Four decades later, Routh expressed similar misgivings: ‘Economics … ignores facts as irrelevant, bases its constructs on axioms arrived at a priori, or ‘plucked from the air’ (Routh, 1975: 26). Routh identified more than a score of leading economists who were similarly critical. The mathematical modelling of neoclassical theory necessarily assumes maximisation as the fundamental purpose of economic agents. In the case of human beings, they are reduced to calculating robots, assumed always to act rationally on the basis of perfect information to maximise their own monetary gain from every transaction. In the case of business, the assumption is, similarly, profit maximisation. The problem with mathematising relationships is that it cannot accommodate qualitative factors, such as fairness, trust and integrity. The nearest neoclassical ideology can get to a values-based consideration is the assumption of legality. Within that constraint, the ideology requires commitment to free markets with open access, minimised government both in terms of regulation and state involvement in the economy, and minimised flat rate taxes that should be avoided where cost effective to do so, but not evaded. It can take no sensible account of time, thus privileging short-term over long. Nor can it accommodate concepts such as sustainability, since the long-term is not calculable. Smith argued that ‘it is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.’3 This argument for progressive taxation has been contested on the grounds that funds paid to the wealthy, will inevitably be invested for the longer term and the benefits from that investment will ‘trickle down’ to those in need. The argument is therefore made that everyone gains from flat rate, rather than progressive, taxation, which also has the benefit of being simple to administer (Armey, 1996). However, the trickle down argument has no validity. Since the opportunities for short-term speculative investment were opened up following the 1986 ‘big bang’ 3  A Smith (1776) Bk V, Ch II, Pt II. This clause referred to property taxes rather than income. It is excluded from some modern editions, and is regarded as contentious by some, eg at http://daviddfriedman.blogspot.co.uk/2011/03/misrepresenting-adam-smith.html.

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computerisation and deregulation of capital markets, they provide considerably higher returns than are available from the real economy such as manufacturing. But the surpluses from such investment continue to be similarly invested, rather than trickling down to the real economy. Under the neoclassical system, though businesses aimed to maximise profits, their managements exercised their judgement over how profit should be distributed. It might be invested in replacement plant and equipment, research and development, training and remuneration of employees, shareholder dividends, or retention within the corporation to provide some security against future risks. However, such decisions are removed from management discretion, if the purpose of business is to maximise the return to shareholders, as has been the mainstream rule in Anglo-America since the 1980s. The Friedmanite neoclassical economics of shareholder primacy has been falsified many times as a theory. In science a falsified theory is discarded, but economics is not a science. With the support and promotion of organised money, shareholder primacy has remained dominant as a belief system and continues to shape human behaviour. Empirical researchers observe and confirm the changed human behaviour is in accord with the ‘theory’. Galbraith referred to concepts like shareholder primacy as institutional truths. That is, not a truth at all, but an overarching lie which has to be bought into if an individual is to survive and prosper in a particular setting (Galbraith, 1989). Outside of Anglo-America, such as in areas of Western Europe, Scandinavia and Japan, shareholder primacy is less dominant. Their more pluralistic systems produce more equal societies which have been shown to achieve better outcomes on almost every social and environmental issue (Wilkinson and Pickett, 2009). But international institutions, such as the IMF and World Bank, regularly make their assistance for developing nations conditional on conformance with the Anglo-American approach, despite its false foundations and destructive outcomes (Coyle, 2011).

V.  Shareholder Primacy’s False Theoretical Base Austrian school economists argued that their programme of liberalism, ‘if condensed into a single word, would have to read: property, that is, private ­ownership of the means of production’ (Vin Mises, 1962: 19). That suggests that shareholders are the private owners of the company, and as such, have legal ­entitlement to whatever it owns and produces. That is an expression of shareholder primacy. However, the reality is that shareholders own share certificates, not the company. Their shares entitle them to such dividend payments as are made and to the possibility of a capital gain on the value of the shares, both quantities being clearly at risk of decline as well as gain. In the event of final liquidation, shareholders are entitled to their share of the residual value, but nothing else.

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Stock markets were established to attract money from the many dispersed investors into the new capital hungry industries. But shareholder primacy justifies the flow of capital in exactly the opposite direction, from businesses in the real economy back to their shareholders. That reversal was estimated in 2012 to be a ‘multi-trillion dollar transfer of cash from US corporations to their shareholders over the past 10 years’ (Fox and Lorsch, 2012). The City of London achieved similar divestment. When Friedman declared his belief in shareholder primacy, it had neither ­theoretical nor valid legal support. Academic economists created a supportive theory by misapplying the legal principal–agent relationship. It had originally been established with the company as principal and its directors acting as agents of the company. However, agency theory proposed shareholders as principals and company directors as their agents. For that shareholder–director relationship to be valid would require the existence of the company to be ignored or denied. To substantiate the non-existence of the company, economists needed to explain away its very apparent reality. Alchian and Demsetz did this by describing it simply as a ‘centralised contractual agent in a team productive process’, the meaning of which was far from clear even from a detailed reading of their much cited article (Alchian and Demsetz, 1972). Jensen and Meckling sought to clarify and confirm the company’s non-existence by describing it as a ‘legal fiction’ (Jensen and ­Meckling, 1976). These two articles quickly spawned a remarkable literature of what became known as transaction cost economics (TCE) supporting the basic agency theory idea by arguing the ability of market forces, free from regulation, to produce any item. This fertile thread of economic theory—900 academic articles published by 2007 (Macher and Richman, 2008)—traced its origins back to a 1932 lecture, which was formalised five years later in a theoretical article on the nature of ‘the firm’. The concept was further developed in the 1960s by Oliver Williamson and others (Williamson, 1964). It challenged the legitimacy of managerial decision makers, notably regarding the allocation of earned profits, arguing the primacy of shareholder interests. In the real world, the company does exist as a separate legal entity—that is its whole point. Moreover, company directors invariably signed legal service contracts with the company formally agreeing to act in its best interests at all times. Company directors have no such contracts with shareholders. Agency theory persists and continues to be accepted as offering justification for the primacy of shareholder interests over all other stakeholders. But it recognises a problem. It accepts that company directors are human beings, and as such, are motivated simply to maximise their own ‘utility’ ie their monetary take from the company. This conflicts with their agency role which requires them always to act in the best interests of their principals, which for agency theorists, means shareholders. This is the ‘agency problem’ which might best be addressed by company directors becoming shareholders themselves. That could most easily be achieved by, for example, introducing share options into company director remuneration

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­ ackages under the pretence that they are a form of performance incentive rather p than simply a defence of the agency position (Khurana, 2007: 317–20). That ­solution to the agency problem has been widely adopted. A defence of agency theory acknowledged the existence of the company as ‘a separate legal person’, but suggested that it was ‘a slave’ and therefore had no human rights (Sternberg, 2004: 37). This curious assertion seems a rather ­desperate attempt to justify the misapplication of the legal agency relationship. Maximising shareholder wealth, while necessarily impoverishing everything else, persists as the core part of the mainstream belief system taught in business schools and universities. It is still widely accepted as the legal responsibility of company directors in a capitalist economy.

VI.  Shareholder Primacy’s Ambiguous Legality In the UK, the legal origins of the claim to shareholder primacy go back to the days of overseas trading expeditions which were conducted on an individual basis as separate enterprises. It was the ship’s captain who acted as the agent of the ship’s owners. As agent, he (invariably!) was empowered, when away from base and out of communications, to enter legally binding agreements on the owners’ behalf, at the same time being required at all times to act professionally in their best interests. This relationship between the ship’s captain and its owners was the origin of the agent-principal legal relationship (Friedman, 1973). As overseas trading progressed, those involved established permanent capital and were able to spread their unlimited liabilities over multiple expeditions. In due course they established their trading businesses as joint stock companies, formed either by royal charter or a separate act of parliament. The incorporation process was greatly simplified by the 1844 Joint Stock ­Companies Act to which limited liability was added in 1856. The 1862 Companies Act confirmed limited companies as legal personalities able to sue and be sued in their own right. This made it clear that the limited company, rather than the shareholders, was the principal to which its directors related as agents. Companies come in many different shapes and sizes … But all are separate legal persons independent of their directors and shareholders. … A company is responsible for its own debts and liabilities. The shareholders and, as a general rule, directors, cannot be forced to pay them … limited companies give their shareholders ‘limited liability’ (Directors’ Handbook, 2010).

Since the company cannot act for itself, it not being an actual person, the directors act for it, as its agents. The pretence that company directors should act as agents of the shareholders nevertheless persisted in the late nineteenth century, on the grounds that shareholders could instruct the board of directors by ordinary majority vote in general meeting (Davies, 2010).

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Munday described agency as ‘notoriously slippery and difficult to define’. It has three distinctive legal traits: 1. Agency is a fiduciary relationship. 2. The relationship will in most cases be consensual. 3. The agent’s role is to act on behalf of the principal (Munday, 2013). The directors of a public company are employed as agents of the company to act in its best interests at all times. There was some argument about this, till the matter was settled with the company’s separate legal personality being confirmed in an 1897 House of Lords ruling on Saloman v A Saloman & Co Ltd (1896). The immediate issue in the case was that creditors of a bankrupt company could not sue the company’s shareholders for repayment. Had the House of Lords decided that shareholders, rather than the company, were deemed to be the principals, then those shareholders would be liable for repayment of the company’s creditors should it become insolvent. The courts consequently adopted a constitutional view of the board, with directors confirmed as agents of the company. That view was that how decisions could be taken, whether by directors or shareholders, was defined in the company’s constitution, ie its Articles of Association. The official UK Government website provides a model Articles of Association for limited companies (Model Articles of Association, 2014).4 That model is 13,632 words long with only one mention of shareholders which was to explain the term ‘transmittee’. It was used to refer to ‘a person entitled to a share by reason of the death or bankruptcy of a shareholder or otherwise by operation of law’. A review of the legal position was conducted by Lan and Heracleous (2010). Nowhere in the world is there a legal statute which confirms company directors as the agents of shareholders. American case law is definitive that directors are not agents of the shareholders. Lan and Heracleous quote half a dozen key cases which make this explicit: directors are fiduciaries of the corporation. The only contrary item of American case law was Dodge v Ford Motor Co in the Supreme Court of Michigan in 1919, which has only ever been cited once, which indicates the weakness of both its precedent value and its influence on legal doctrine. Corporate law in most Anglo-American countries still confers ultimate power to directors, not shareholders …Shareholders’ rights over directors are remarkably limited in both theory and practice. (Lan and Heracleous, 2010, at 299).

British statute law is more ambiguous, allowing interpretations which may differ, but which have never been properly tested. Interpretations by influential bodies such as the Institute of Directors (IoD) and the Confederation of British Industry

4  Model Articles of Association for Limited Companies, first published 21 November 2014, last updated 3 March 2015; available at www.gov.uk/guidance/model-articles-of-association-for-limitedcompanies.

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(CBI), appear therefore to have had perhaps a greater influence on the general understanding of the law than does the law itself. The Companies Act 1985 stated that directors, being agents of the company, owe a fiduciary duty to their company. The Institute of Directors explained that as meaning ‘they must show it the highest loyalty and act in good faith in its interest’ (Institute of Directors, 1991). The Companies Act 2006 changed the wording, to describe directors’ duties as ‘to promote the success of the company’ but added ‘for the benefit of its members as a whole.’ Though the word ‘members’ is used, its meaning is no more and no less than ‘shareholders’. The reason for the insertion of ‘for the benefit of its members as a whole’ is uncertain. It has been suggested that the aim was to ensure that directors did not indulge in any activity which might amount to insider dealing—thus the aim was to ensure that all shareholders were treated alike. An alternative interpretation is that it confirms that directors must have regard to the interests of shareholders over all the other interested parties. The practical effect of the insertion has therefore been to add ambiguity. Similar ambiguity has been produced with the various codes of governance practice, which while preaching enlightenment, facilitate the opposite on a voluntary ‘comply or explain’ basis (Cadbury, 1992). The net effect is of the law being opened to various explanations. The IoD’s explanation, which previously had been that a company director must act as a fiduciary of the company, was changed by 2010 to: ‘Many of the duties imposed under the law arise because the director acts as a fiduciary for the shareholders of the company’ (Directors’ Handbook, 2010). The IoD also refers to directors as ‘custodians of the company’, which appears to disguise the refocusing on shareholder interests rather than company interests. Similar obfuscation appears in the 2006 Companies Act sub-clauses requiring directors also to have regard to: a) the likely consequences of any decision in the long term, b) the interests of the company’s employees, c) the need to foster the company’s business relationships with suppliers, customers and others, d) the impact of the company’s operations on the community and the environment, e) the desirability of the company maintaining a reputation for high standards of business conduct, f) the need to act fairly as between members of the company (Section 172, Companies Act 2006).

These clauses embody what has been referred to as Enlightened Shareholder Value (ESV). But the legal implications remain open to interpretation. If the addition of ‘for the benefit of its members as a whole’ is accepted as meaning shareholders have primacy, then the other sub-clauses have little value, amounting to little more than window dressing. ESV has no legal force and can be interpreted on a ‘comply or explain’ basis and can therefore be ignored with impunity.

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The same sleight of hand was achieved in the USA where suspicion had always been that ‘the few’ were always out to exploit ‘the many’: In the 1860s and 1870s, men like Vanderbilt, Jay Gould and Jim Fisk fought tawdry ­battles over the stock market, the economy and the corpses of railroad corporations. The investing public was unmercifully fleeced (Friedman, 1973: 391).

Khurana charts the US Business Roundtable interpretation. Its 1990 policy statement included: Corporations are chartered to serve both their shareholders and society as a whole … Resolving the potentially differing and various interests as well as the best long term interest of the corporation and its shareholders involves compromises and trade-offs.

By 1997 the Business Roundtable had moved: [T]he paramount duty of management and boards of directors is to the corporation’s stockholders; the interests of other stakeholders are relevant as a derivative of the duty to stockholders (Khurana, 2007: 320–21).

Despite there being no more legal support for shareholder primacy than there is valid economic theoretical support, it has nevertheless become the foundation of the Anglo-American approach. In the UK, the law had been made more ambiguous, enabling the shareholder primacy argument to be at least potentially ­allowable, although it is not explicitly supported and has never been tested in law. Professional legal advice has included the suggestion to remove the ambiguity from the 2006 Companies Act wording to ‘just require directors to act in good faith to promote the success of the company (end of story) and that this means the company entity.’5 In summary, the origins of the legal agency relationship which underpinned owner interests before the creation of joint stock companies were simple enough and clear. With the creation of the company as a legal entity, that agency became dedicated to the company rather than its investors who were separated by limited liability. Shareholders have never had legal designation as principals. Anglo-American law supports the primacy of company interests. It was directors’ responsibility to balance the interests of the various stakeholders. However, over the past few decades that legal position has been progressively weakened with ambiguity introduced, so as to make shareholder primacy at least potentially tenable and the financialisation of the management task at least possibly justifiable. Shareholder primacy has since become the dominant belief system, expensively promoted and widely promulgated by the organised money establishment. It is the generally held belief among all the sectors of organised money that directors have

5  A Keay (2014), the quotation is from a personal email dated 13 February from Professor Andrew Keay then of Kings Chambers, Manchester, Leeds and Birmingham, now of Leeds University School of Law. Professor Keay agreed to this quotation.

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a legal duty to uphold shareholder primacy. Beyond those self-interested beneficiaries, it appears also to have become the dominant belief among the general public.

VII. Conclusion This chapter has sought to illustrate the destructive power of shareholder primacy despite its lack of either valid theoretical or legal support. As a belief system, it nevertheless continues to dominate the corporate landscape and beyond. It continues to drive the depletion of Earth’s finite resources, escalating the inequalities of wealth and income to unprecedented levels, polluting Earth’s oceans and atmosphere, resulting in potentially irreversible climate change, putting at hazard even survival of the human race. All this, just in order to prioritise short-term profit for the organised money establishment. Keynes ended his General Theory with the following much quoted warning: [T]he ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. … Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. … it is ideas, not vested interests, which are dangerous for good or evil (Keynes, 1936: 383).

John Ruskin had said much the same 74 years earlier: [A]s in the instances of alchemy, astrology, witchcraft and other such popular creeds, political economy has a plausible idea at the root of it. … The reasoning might be admirable, the conclusion true, and the science deficient only in applicability (Ruskin, 1862).

Nevertheless, the ‘madmen in authority’ persist in the application of shareholder primacy, despite its falsity and despite its destructive results. Just as shareholder primacy was becoming established and capital markets were computerised and deregulated, an article in the Harvard Business Review discussed the narrow cost-minimising focus of business management that was then becoming dominant, describing it as ‘a syndrome, a mind-set, which stunts strategic vision and inhibits innovation. Breaking loose from … the mind-set is not easy. It requires a change in culture, in habits, instincts and ways of thinking and reasoning’ (Skinner, 1986). Today, we have greater capabilities than ever before for achieving a sustainable outcome, but we are applying those capabilities in exactly the wrong direction. To focus them on resolving the destructions outlined at the beginning of this chapter will require a fundamental change in culture and ways of thinking and reasoning. The falsity of economic ideology and the ambiguity of law, currently being used to support shareholder primacy, must be acknowledged and corrected if real culture change is to be achieved.

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References Alchian, AA and Demsetz, H (1972) ‘Production, Information Costs, and Economic Organisation’ 62 American Economic Review 778. Armey, RK (1996) The Flat Rate Tax: a Citizen’s Guide on What it Will Do for You, Your Country and Your Pocketbook (New York, Fawcett-Columbine). Baumol, W (1986) ‘Entrepreneurship and a Century of Economic Growth’ 1 Journal of Business Venturing. Bowman, A, Erturk, I, Folkman, P, Froud, J, Haslam, C, Sukhdev, J, Leaver, A, Moran, M, Tsitsianis, N and Williams, K (2015) What a Waste: Outsourcing and How it Goes Wrong Manchester Capitalism Series (Manchester, Manchester University Press). Cadbury, A (1987) Final Report of the Committee on the Financial Aspects of Corporate Governance (London, Gee). Chandler, A (1977) The Visible Hand: the Managerial Revolution in American Business (Cambridge MA, Belknap Press of Harvard University Press). Coase, R (1937) ‘The Nature of the Firm’ 16(4) Economica 386–405. Companies Act 2006, Part 10, Chapter 2, Paragraph 172. Corporate Reform Collective (2014) Fighting Corporate Abuse: Beyond Predatory Capitalism (London, Pluto Press). Coyle, D (2011) The Economics of Enough: How to Run the Economy as if the Future Matters (Princeton NJ, Princeton University Press). Davies, P (2010) Introduction to Company Law 2nd edn (Clarendon Law Series, Oxford University Press). Director’s Handbook (2010) Opening paragraphs of ‘Introduction’ (London, Institute of Directors). Fletcher, L (2010) Startups fuel growth in super-fast trading, Reuters on line. Available at www.reuters.com/article/us-highfrequency-start-upsidUSTRE6363VE20100407. Fox, J, and Lorsch, JW (2012) ‘What Good Are Shareholders?’ 90(7/8) Harvard Business Review 48–57. Friedman, M (1962) Capitalism and Freedom (Chicago, Chicago University Press). Friedman, LM (1973) A History of American Law (New York, Simon & Schuster Touchstone). Friedman, M (1977) ‘From Galbraith to Economic Freedom’, Occasional Paper 49 (London, Institute of Economic Affairs). —— (1962) Capitalism and Freedom (Chicago, Chicago University Press). Galbraith, JK (1989) In pursuit of the Simple Truth, Commencement address to women graduates of Smith College, Massachusetts. Ghoshal, S (2005) ‘Bad Management Theories Are Destroying Good Management Practices’ 4(1) Academy of management Learning & Education 75–91. Harding, R (2013) The Collaborative Entrepreneur, Think Piece 8 (Manchester, Co-operatives UK).

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Heffernan, H (2011) Wilful Blindness: Why we Ignore the Obvious at Our Peril (London, Simon & Schuster UK Ltd). House of Commons Public Accounts Committee (2013–14) Contracting our Public Services to the Private Sector, Session 2013–14. HC777 (London, Stationery Office). Institute of Directors (1991) Guidelines for Directors 5th edn (London, Director Publications). International Consortium of Investigative Journalists (2016) The Panama Papers: Politicians, Criminals and the Rogue Industry that Hides their Cash, available at https://panamapapers.icij.org. Jensen, MC and Meckling, WH (1976) ‘Theory of the Firm: Managerial Behaviour, Agency Costs and Ownership Structure’ 3 Journal of Financial Economics 305–60. Judt, T (2008) Ill Fares the Land (London, Allen Lane). Kalantarnia, M, Kahn, F and Hawboldt, K (2010) ‘Modelling of BP Texas City Refinery Accident using Dynamic Risk Assessment Approach’ 88(3) Process Safety and Environmental Protection 191–99. Kaminska, I (2017) ‘Innovative Criminals Embrace Online Opportunities’ Financial Times (15 March 2017) Comment column on Technology. Kay, J (2015) Other People’s Money: Masters of the Universe or Servants of the People? (London, Profile Books). Keynes, JM (1936) The General Theory of Employment, Interest and Money (London, Macmillan). Khurana, R (2007) From Higher Aims to Hired Hands: the Social Transformation of American Business Schools and the Unfulfilled Promise of Management as a Profession (Princeton, Princeton University Press). King A, and Crewe, I (2013) The Blunders of our Governments (London, One World Publishers). Kondratiev, ND (November 1935) ‘The Long Waves in Economic Life’ The Review of Economic Statistics. Lan, LL, and Heracleous, L (2010) ‘Rethinking Agency Theory: the View from Law’ 35(2) Academy of Management Review 294–314. Macher, JT, and Richman, BD (2008) ‘Transaction Cost Economics: An Assessment of Empirical Research in the Social Sciences’ 10(1) Business and Politics Article 1, 3. Maddison, A (1982) Phases of Capitalist Development (Oxford, Oxford University Press). Mayo, E (2016) Values: How to Bring Values to Life in Your Business (Saltaire, Greenleaf Publishing). Molina, M, et al (2014) What we know: the reality, risks and response to climate change report by the American Association for the Advancement of Science Climate Science Panel. Munday, R (2013) Agency: Law and Principles 2nd edn (Oxford, Oxford University Press).

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Onyimadu, CO (2015) Beyond the Neoclassical Paradigm: A Real World Economics Proposal Social Science Research Network, available at https://ssm.com/ abstract=2887766. Pearson, G, and Parker, M (2016) ‘Is Small Always Beautiful? A Dialogue’ 121(4) Business & Society Review 549–67. Pearson, G (1995) Integrity in Organisations: an Alternative Business Ethic (Maidenhead, McGraw-Hill). —— (1999) Strategy in Action: Strategic Thinking, Understanding and Practice (Harlow, Financial Times Prentice Hall). Piatier, A (1984) Barriers to Innovation (London, Francis Pinter). Pimm, SL, Russell, GJ, Gittleman, JL and Brooks, TM (1995) ‘The Future of Biodiversity’ 269 Science 347–350. Porter, ME (1980) Competitive Strategy: Techniques for Analyzing Industries and Competitors (New York, The Free Press). Roosevelt, FD, announcing the Second New Deal, October 1936, quoted in Bowman et al, What a waste (2015). Routh, G (1975) The Origin of Economic Ideas (London, Macmillan). Ruskin, J (1862) ‘The Roots of Honour’ the opening essay of Unto this Last, available in Traffic (London, Penguin, Little Black Classics series). Salomon v A Salomon And Co Ltd [1896] UKHL. Schumpeter, JA (1939) Business Cycles: a Theoretical, Historical and Statistical Analysis of the Capitalist Process (New York, McGraw Hill). Shaxson, N (2011) Treasure Islands: Tax Havens and the Men who Stole the World (London, Bodley Head). Skinner, W (1986) ‘The Productivity Paradox’ Harvard Business Review, July–August. Smith, A (1776/1993) An inquiry into the Nature and Causes of the Wealth of Nations Book I, Chapter II (Oxford, Oxford World’s Classics). —— (1776) An inquiry into the Nature and Causes of the Wealth of Nations Book V, Chapter II, Part II. Sternberg, E (2004) Corporate Governance: Accountability in the Marketplace (London, The Institute of Economic Affairs). Tett, G (2015) ‘Penalise the banks but use the money well’, Financial Times (14 November 2015). The Economist, ‘How Britain’s rate-fixing scandal might spread—and what to do about it’ (7 July 2012), available at www.economist.com/node/21558260. United Nations Population Division (2008) World Population Prospects, The 2008 Revision. Vidal, JB, Draca, M and Fons-Rosen, C (2010) Revolving Door Lobbyists 5th Annual Conference on Empirical Legal Studies (16 July 2010). Available at https://ssrn. com/abstract=1641217 or http://dx.doi.org/10.2139/ssrn.1641217. Von Mises, L (1962) The Free and Prosperous Commonwealth (R Raico (trans), A Goddard (ed), New York, Van Nostrand Co).

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Webster, M (ed) (2010) The Director’s Handbook (published jointly by IoD, Pinsent Masons and Kogan Page). Wilkinson, R, and Pickett, K (2009) The Spirit Level: Why more Equal Societies Almost Always do Better (London, Allen Lane). Williamson, OE (1964) The Economics of Discretionary Behaviour: Managerial Objectives in a Theory of the Firm (Englewood Cliffs NJ, Prentice Hall).

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3 The Separate Legal Entity and the Architecture of the Modern Corporation JEROEN VELDMAN

I. Introduction Central to the ability to recognise, respect and balance stakeholder needs for the board of a public corporation are the ways in which the status and purpose of the modern corporation are understood (Veldman et al, 2016). Shifting conceptions of the status and purpose of the modern corporation have led to different answers to the questions how, by whom, by what and for whom corporate governance should organise the procedures and processes that direct and control business. From the 1970s onwards, the ‘Nexus of Contracts’ (NoC) theory has become central in regulation, and codification, in public policy and regulatory decisionmaking, in accounting theory, in executive and investor practice, and in the ­curricula of many law and management schools (Horn, 2012; Khurana, 2007; Pye, 2001, 2002). Based on the notion that shareholders contract with executives, it promotes an agency theoretic model of corporate governance, in which ­executives, as ‘agents’, respond exclusively to shareholders, as ‘principals’. In this model, the purpose of the modern corporation is interpreted as serving shareholder value creation and executive ‘judgement’ is oriented towards the production of ‘value’ as measured by short-term market valuation of the corporation (Millon, 2014). The payoffs and costs of this model for corporate governance have been substantial. As corporate directors and officers are oriented towards serving the interests of shareholders, corporate proceeds are progressively distributed in their direction. To provide adequate signals to the market (and ramp up their own remuneration), corporate executives since the 1970s have increased dividend payouts and stock buybacks, while shareholders have reciprocally approved massive increases in executive remuneration (Lazonick, 2014). These strategies have provided negative outcomes for corporations as productive entities with a long-term horizon, as it materialised in the form of substantial decreases for business development and

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Research and Development. They also provided negative outcomes for the societies in which public companies function, as the adoption of mergers and acquisitions as well as buyouts and demergers, ‘downsizing’ and ‘divestment’, outsourcing, and restructuring resulted in massive layoffs, falling job tenures, use of zero hours contracts and defined contribution pension schemes and a rising amount of yearly working hours for employees. The nexus of contracts theory thus provided high payouts to short-term oriented shareholders by enticing managerial executives to engage in excessive risk-taking by adopting a strongly diminished regard for the consequences of corporate strategy beyond the impact of the next quarter’s ­numbers; and to offload long-term costs of such risk-taking to public corporations, employees and states (Dore, 2008; Fourcade and Khurana, 2013; Jacoby, 2008, 2011; Jansson et al, 2016; Kay, 2015; Stout, 2012; Veldman et al, 2016). What is interesting about the nexus of contracts model, specifically in the light of its dominance as a model for corporate governance theory and practice, is that its main theoretical assumptions have questionable theoretical validity. A rich literature explores the problematic theoretical identification of the separate legal entity (SLE); of claims to ‘ownership’ and ‘control’; and of the relation between ‘agents’ and ‘principals’ in relation to the legal conception of these terms (Aglietta and Rebérioux, 2005; Biondi et al, 2007; Millon, 2014; Robé, 2011). In this chapter I will explore these debates in the context of the understanding of the SLE, and specifically in relation to the role of the SLE in providing the ‘architecture’ of the modern public corporation as a structure of rights and obligations. I start with the historical development of the SLE as a specific type of legal construct and its importance for the development of the modern public corporation. Then, I explore how the SLE provides the basis for an architecture that conditions the roles, positions and relations between corporate constituencies on the basis of a number of tradeoffs between these constituencies. I continue by looking at how these tradeoffs relate to the architecture of the modern corporation, and notably to the function and role of the board. I conclude by arguing that the specific architecture of the modern corporation, together with the contingent status of the SLE, provides a combined basis for the development of a model for corporate governance that can orient boards of public corporations toward long-term value creation in the interest of broad sets of stakeholders.

II.  Creating the Modern Public Limited Liability Corporation The way in which the SLE has been postulated and developed as a legal concept since the start of the nineteenth century provides the basis for the modern public limited liability corporation. By providing a ‘reified’ construct that is attributed with ownership and liability in and by itself, the SLE conditions the public ­corporation’s architecture, specifically by providing the basis for the emergence of

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the board and of executive management as distinct corporate ‘organs’ and by setting the scope and direction of their fiduciary duties (Biondi et al, 2007; Johnson and Millon, 2005; Millon, 2014; Robé, 2011; Veldman, 2016). A short description of the historical emergence of the modern public limited liability corporate form helps to illustrate the centrality of the SLE as a reified legal construct. The modern public limited liability corporate form was preceded by the partnership form, in which unlimited liability circumscribed the assumption of ownership and control. In the nineteenth century, unlimited liability for losses and debts by individuals engaging in commercial ventures was thought to be a basis for the ‘morality of the market’, as it was deemed to act as a strong incentive to direct the agency of investor-partners toward the long-term interest of the partnership and, thereby, to minimise the risk for others with a non-ownership stake in the partnership as a business venture (eg employees, suppliers, customers, community, state etc). The risk for investor-partners of losing personal assets if they failed to manage business risks was the basis for the assumption of full control over management and strategy as a legitimate function of their property ownership (Ciepley, 2013; Djelic, 2013; Johnson, 2010; McLean, 2004). The development of the SLE during the nineteenth century predicated an almost complete shift away from this model. As the reified SLE was attributed with ownership and liability in its own right, this new construct created the basis for a new organisational ‘architecture’. The separation between shares and the assumption and consequences of the day-to-day management of a public corporation turned shareholders into a largely external constituency, and entitled shareholders to the ‘residual cash flows of the company’ (Ghoshal, 2005: 79), but no longer gave a direct claim to ownership or management over ‘the corporation, the assets or the firm’ (Robé, 2011: 31). The development of this new architecture was based on an elaborate quid pro quo, in which (minority) shareholders strongly benefitted. The creation of a new architecture with the SLE at the heart of the architecture of the modern corporation allowed among other things to: remove the attribution of unlimited liability to investor-partners; provide legal protection for minority shareholders against expropriation by majority shareholders; provide protection against sudden or unilateral dissolving of the firm at the exit or death of a partner; conceive of shares as fully paid up and thus free-standing rights to a portion of the revenue stream of the company; and to separate shares from control rights, offering ‘liquid’ transferability, the ability to reinvest in an open market with relatively little trouble or cost, a fast exit opportunity, and the potential for secondary trading gains (Ireland, 1999; Lamoreaux, 1998). In comparison to the traditional partnership model, the development of the SLE into a reified legal construct and the subsequent development of a new ‘architecture’ for the public corporation dramatically transformed the role, functions and claims of investor-partners (Millon, 2014), de facto creating an entirely new type of ‘shareholders’. In the modern public corporation, these ‘shareholders’ gave up direct ownership and control claims and in exchange received a large set of privileges and protections. Notably, this new breed of shareholders gained

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the capacity to remain ‘outside’ the corporation and ‘inside’ the market, creating the conditions for (minority) shareholders to relatively safely orient themselves toward the market value of the corporation, while disengaging from the risks of actual management (Ireland, 1999; Ireland, 2010; Veldman and Willmott, 2017). The central role of the SLE in creating a new corporate architecture introduces two questions. The first question, which I will engage with in the next section, is how the SLE itself is constituted as a reified construct in relation to attributions of ownership and liabilities. The second question, which I will engage with in sections IV and V, is how a reified conception of the SLE relates to the architecture of the modern corporation. Specifically, I will explore how a transfer of attributions of ownership and liability to the SLE as a reified construct produced a shift in the role, functions and claims of corporate constituencies in the new architecture of the modern public corporation.

III.  The Separate Legal Entity Although the SLE provides the centrepiece for a new institutional architecture, the precise status of this legal construct remains thoroughly unsettled. During its development in the nineteenth century, the SLE was initially conceived as a placeholder that provided a shorthand to a specific problem of ownership and liability attribution, rather than a full-fledged legal ‘subject’. Even though the SLE gradually came to represent the corporation as an ‘it’, rather than a ‘they’, it continued to do so as highly specific ‘legal fiction’ with a reified status. However, the status of this specific ‘legal fiction’ gradually developed into an ‘extended’ conception, in which the identification of this construct as a legal ‘entity’ provided the basis for attributions of (contractual) agency and (citizenship) rights to the SLE. Between the placeholder and the extended conception, the identification of the status of the SLE came to relate to multiple referents, including the SLE as a functional placeholder or a legal ‘entity’, ‘subject’ or ‘person’; the corporation as a whole; a (contractual) aggregation of individuals; particular constituent groups; or as any combination of these positions. As the amount of referents used to explain the status of the SLE and the modern corporation increased, so did the attributions of agency, ownership, rights and protections with regard to all these referents, further complicating the status of this legal construct (Naffine, 2003; Veldman, 2016). By the end of the twentieth century, the legal understanding of the SLE had become so convoluted that it most resembled a ‘Cheshire Cat’. The convoluted status of the SLE was problematic because attributions of (contractual) agency, liability, ownership and rights to the SLE or ‘the corporation’ could map onto a multiplicity of referents, and even onto multiple referents at the same time. As a result, the status of the SLE as a reified construct and its relation to other legal constructs like citizens and states became conceptually unclear, providing the basis for broad contestation of the developing status of this new legal construct

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(Maitland, 2003; Robé, 1997; Veldman, 2016). Notwithstanding the ongoing contestation of the status and effects of the SLE, pragmatism was consciously advised with regard to the fundamentally unstable theoretical and philosophical status of this legal construct, in order to preserve its functional outcomes (Dewey, 1926, 1931; Foster, 2006; Hallis, 1978; Lawson, 1957). Although the precise conceptual status of the SLE and its relation to the broader concept of ‘the corporation’ remains elusive, the SLE still provides the basis for a specific corporate architecture. Insofar as the SLE is attributable with ownership and liability, and with broader attributions of agency and (citizenship) rights, it functions as a reified point of attribution for such properties in the legal and economic systems of representation (Veldman, 2016). By being attributed with these properties and functions as a reified construct (as an ‘it’) in lieu of ‘the corporation’ and of constituent groups (like the investor-partners) the SLE creates the conditions for a fundamentally new architecture, compared to the unlimited liability partnership form. In this regard, even if the conceptual status of the SLE remains fundamentally unclear, the effects of the SLE as a reified legal construct that allows for the attribution of ­ownership, liability, agency in relation to the creation of a new corporate architecture, and the way in which the SLE as a reified construct functions in relation to that architecture can still be examined. In the next section I will explore the development of the SLE as the starting point for the emergence of a new architecture in which the board and executive management function as corporate ‘organs’ with their fiduciary duties circumscribed by this institutional setup.

IV.  Corporate Organs and Fiduciary Duties The SLE provides the basis for a new corporate architecture. Whereas in the unlimited liability partnership shareholders had both financial and normative claims to the functions of ownership and control, postulating the SLE means that the assets and liabilities of the corporation are attributed to the SLE. The postulation of the SLE structurally bars shareholders from access to corporate assets and from direct engagement in managerial functions. As a result, the nature, role, position, relations and claims of shareholders as a constituency are both functionally and theoretically repositioned and redefined as just one (external) constituency amongst others compared to the unlimited liability partnership (Boatright, 1994; Blair and Stout, 2011; Ridley-Duff and Bull, 2015). Shareholders accepted this new position, in which they came to function as an external constituency with no direct affordance of rights, because it provided them with rights, privileges and protections that investor-partners did not and could not have in the unlimited liability partnership form. Even if shareholders are afforded specific rights, eg ­voting rights, rights of inspection and rights to bring derivative lawsuits to enforce corporate claims (Millon, 2014: 1043), by a legal or corporate governance

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f­ramework, those rights are not innate to the role or function of the shareholding constituency in the modern corporation. Rather, they are to be understood as ‘vestiges of an older age when shareholders, like partners, controlled their firms …’ (Millon, 2014: 1025). The central role of the SLE and the subsequent redefinition and repositioning of shareholders in a new architecture is important to understand the basis for the role and claims of shareholders, but also for the role of directors and officers. The retreat of investor-partners to a disengaged and external function in exchange for privileges and protections effectively vacated the function of management previously occupied by those investor-partners. In the vacuum left by the investor-­partners the board emerged as a new corporate organ endowed with the function of strategic management (Veldman and Willmott, 2017). As Leo Strine, Chief Justice in Delaware argues: ‘corporate law clearly vests the power to m ­ anage the corporation in its directors, and not in the stockholders’ (Strine, 2010: 4). In comparison to the unlimited liability partnership, the function of ­strategic management thus shifts from a council of engaged investor-partners with a direct financial and normative claim to ownership and control over management, to the board of directors as a separate organ of the public corporation. The SLE thus puts a corporate architecture in place, in which the board of directors emerges as an autonomous and independent corporate ‘organ’ with the role, function and discretionary space necessary to determine and implement corporate strategy (Segrestin and Hatchuel, 2011; Veldman and Willmott, 2017). As corporate assets and liabilities, and later agency and rights, are attributed to the SLE in lieu of ‘the corporation’; as the position, role and claims of the shareholding constituency becomes those of an (external) constituency, with a similar basis for claims as other corporate constituencies; and as the role and function of the board of directors emerges as an organ of the corporation as a whole, the function and role of the corporate board are fundamentally directed toward the corporation, represented by the SLE as an ‘entity’ (Aglietta and Rebérioux, 2005; Biondi et al, 2007; Blair, 2015; Ireland, 1999; Millon, 2013). For this reason, fiduciary duties in the corporate architecture shift away from the shareholders, and toward ‘the corporation’: ‘If the officers are supposed to act on behalf of the corporate entity— which comprises more than just the shareholders—it makes no sense to conceive of directors’ fiduciary duties solely in terms of the shareholders.’ (Johnson and Millon, 2005: 1645). In sum, the SLE provides the basis for a new corporate architecture. The nature, role, position, relations, rights and claims of all corporate constituencies are conceived in relation to the SLE as a reified construct, and their new status is completely different from their status in the context of the unlimited liability partnership. Therefore, the SLE fulfils a fundamental role in providing a new architecture, and the reconceptualisation of the status of the constituencies involved in the modern public corporate form. Once the SLE is postulated and the corporate architecture is put in place, there is no way back to an ex ante situation without very fundamental and very difficult choices with regard to the nature,

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role, p ­ osition, relations, rights, claims and duties to the corporate constituencies (Maitland, 2003; Robé, 2011). Notably, in the new corporate architecture, the position, role, function and claims of the shareholding constituency become external to the corporation, while the role, function and duties of the corporate board of directors emerge and are conceived in direct relation to the SLE, which represents the corporation as a whole.

V.  The SLE and Directors’ Duties It has been argued that the specific legal understanding of the SLE and the redirection of fiduciary duties it provides can be used to expand narrow notions of corporate governance. Johnson and Millon argue that: ‘It is indisputable that officers are agents for the corporate enterprise … Their responsibility to any particular corporate constituency … flow[s] from decisions made in the interest of the corporation as a single, undifferentiated entity.’ (Johnson and Millon, 2005: 1644). Similarly, Parkinson finds that corporate officers need to act ‘in the best interests of the company’ (Parkinson, 2003: 493), while Robé (2011: 32) argues that, executives ‘are not and cannot be the shareholders’ agents: they can only be the agents of the corporation which is their sole principal since it is the sole owner of the assets they manage on its behalf.’ Similarly, ‘Delaware corporate law, the most influential body of law for United States publicly held corporations, does not reflect an agency model. Directors’ fiduciary duties are owed not to the shareholders alone, but rather to “the corporation and its shareholders.”’ (Millon, 2014: 1035). As executives and board members are required to act in the best interests of the ‘entity’, the ‘company’, the ‘enterprise’, or the ‘corporation’ as their ‘principal’, these notions provide a positive direction for directors’ fiduciary duties toward the ‘entity’, which arguably represents the corporation as a whole by virtue of its representative quality and by virtue of its central role in the corporate architecture. However, as explored above, the link between the entity and the corporation is far from unequivocal. Because the SLE provides its functions in relation to a multiplicity of referents, the corporate ‘entity’ provides an unclear and inconsistent basis for the positive identification of those referents. As a result, the direction, alignment and mapping of directors’ fiduciary duties toward specific constituencies or interests is problematic on the basis of the ‘entity as a principal’ argument alone (see Mansell, 2013). Despite these conceptual problems with mapping fiduciary duties directly onto the SLE as an entity, we can still explore the functioning of the SLE, and specifically its central role in the corporate architecture, to explore the status of duties in relation to that corporate architecture and its outcomes. Arguably, the SLE is predicated on a legal quid pro quo that transfers ownership and liability to the entity. This legal quid pro quo makes the claims and interest of shareholders in a public corporation largely external and indirect and provides the

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basis for an architecture in which the corporate board begets its role, functions and mandate as an organ of the public corporation. As the board assumes its role and function, and the discretionary space to discharge its duties, by virtue of its position as an autonomous and independent corporate organ with fiduciary duties to the SLE, it can be argued that the fiduciary duties of the board of directors are conditioned by a negative duty to resist claims of any particular constituency that would come at the expense of the entity itself or at the expense of constituencies that are connected to and/or have an interest in the entity: ‘Their responsibility to any particular corporate constituency is only indirect, and any benefits (or costs) to such groups are incidental effects that flow from decisions made in the interest of the corporation as a single, undifferentiated entity.’ (Johnson and Millon, 2005: 1644). As such, the fiduciary duties of a corporate board include a positive duty to resist any and all direct and indirect ownership and control claims to or via the entity by any constituency. Moreover, in the architecture called forth by the SLE the role and function of all corporate constituencies emerge in relation to their role, function and posi­tion as ‘organs’ or constituent groups of the modern corporation. The SLE endows the modern public corporation with a large set of attributions of agency and rights in relation to a multiplicity of referents, which includes the corporation as a whole as well as the corporate constituencies (eg citizenship rights, which in practice are granted on the basis of an identification of the corporation as an entity and as a collection of individuals or constituencies with separate rights and claims, see Blair, 2015; Mayer, 1989; Veldman and Parker, 2012). As the SLE calls forth an institutional architecture that provides the basis for the conception of the position, role, function and claims of corporate constituencies; as the SLE provides a reified construct that in practice functions as a representation that is attributed with agency and rights for and on behalf of ‘the corporation’; and as the board is held to resist the prioritisation of claims by specific constituencies, it can be argued that the SLE functionally has come to represent ‘the corporation’ as a whole. By extension, it can be argued that status of the SLE as an ‘entity’ can be interpreted ‘as a distinct social and institutional entity, defined and protected by corporate law, standing at the centre of relationships involving various groups of stakeholders’ (Gospel and Pendleton, 2003: 560). Moreover, it can be argued that the status as well as the claims of constituent groups arise from the corporate architecture that arises in direct relation to the SLE. As in this architecture no claims are originary or a priori more valid than those of other constituencies, it can be argued that the architecture of the modern corporation can be conceptualised as a ‘federation’ of corporate constituencies, and that the fiduciary duties of the board of directors toward the SLE are toward all these corporate constituencies in equal measure. In relation to the architecture of the modern corporation that arises in relation to the SLE, the role of the board is to adjudicate between the relative claims of all constituencies toward or via the SLE as the reified representation of ‘the corporation’ (Millon, 2014: 1043).

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In this regard, the exclusive identification of ‘the corporation’ with the shareholders and the prioritisation of shareholders’ claims is problematic. Claims to ‘residual ownership’; to direct contractual relations between shareholders and directors and/or executives; or to a status for shareholders as the exclusive ‘members’ of the corporation, based on an implicit continuation of their role as investor-partners, as in section 172 of the 2006 UK Companies Act (Collison et al, 2014), all negate the specific status and role of the SLE; of the architecture that it puts in place; and of the role and duties of the board of directors in a public corporation. As such claims negate the elaborate quid pro quo that is necessary to constitute and maintain the architecture of the modern corporation, and the structure of rights and obligations that it puts in place between corporate constituencies, they directly put into question the privileges and protections provided to all corporate constituencies—including the shareholders—by the SLE.

VI.  Social Licence Apart from the SLE, corporate architecture and a legal quid pro quo, there is a second reason to argue that boards of directors would do well to maintain a view of the corporation as a quasi-social institution with duties to broad sets of constituencies (Berle and Means, 2007 [1932]). This second reason focuses on the connection between the problematic theoretical status of the SLE and the practical implications of the modern corporation. In section II I explored how the privileges and protections provided by the SLE are based on the conscious acceptance of multiple, shifting and mutually exclusive referents. The broad theoretical ramifications of the pragmatism that supported the development of the SLE as a reified legal construct are acknowledged across disciplinary domains (Biondi et al, 2007; Bowman, 1996; Schrader, 1993; Zey, 1998). The development of this legal construct supported a large number of economic, social and political developments, including the development of oligopolistically organised capitalism. The combination of sustained theoretical unclarity and broad practical effects made the SLE the object of significant contestation from many quarters during the ­nineteenth and twentieth centuries (Dodd, 1931; Hannah, 2010; Ireland, 2005; Johnson, 2010). Notably, Berle and Means, in their seminal 1932 volume The Modern Corporation and Private Property, found that the public limited liability corporate form presented the means to build increasingly dominant corporate empires, resulting in oligopolistic economic organisation. Charting a constant increase of highly dispersed shareholdings in US public corporations, they argued that these increasingly dominant organisations were no longer under effective control of the shareholders, while other means of control, including judicial oversight or state intervention, were also largely ineffective. The combination of the expanding influence and impact of the modern corporation with the weak legitimation for control

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by a managerial cadre who were usually not investors, and a de facto absence of effective means of control over these new ‘princes’ led Berle and Means to argue that the exercise of managerial discretion over public corporation was tied to a social trade-off. Actively attending to, and balancing, the concerns of diverse stakeholders and providing notionally equitable outcomes for multiple constituencies would be central to achieving a ‘public consensus’ that would continue to provide the social legitimacy for the modern corporation under managerial control as well as oligopolistic economic organisation. Berle and Means were well aware of the specific architecture put in place by the SLE and its consequences (Berle and Means (2007 [1932]: 244). However, their argument why managers needed to maintain a social licence for the modern corporation was more pragmatic. For them, the broad benefits of the use of the modern public corporation for multiple constituencies, including the capacity for central economic coordination and, hence, oligopolistically organised capitalism, meant that unfettered managerial discretion over these dominant new institutions could only be legitimised in the long run if it would remain tied to the provision of ‘economic citizenship’ and the upkeep of a broad ‘social contract’ that would serve the interests of a range of beneficiaries (Berle and Means, 1968 [1932]: 313). The analysis provided by Berle and Means thus built on the elements already present in the legal quid pro quo and reinforced and expanded them with a social quid pro qui that coupled the effects of the development of the modern corporation to the direction of managerial duties toward the long-term development of the corporation and the interests of both corporate constituencies and broader societal stakeholders (Moore and Rebérioux, 2007; Diamond, 2011).

VII.  Discussion and Conclusions I explored how the currently dominant view of the public corporation in corporate governance theory, the ‘nexus of contracts’ view, has typified the role of directors and officers as ‘agents’ who, on the basis of contractual or (residual) ownership claims, stand in an exclusive dyadic governance relation to shareholders as their putative ‘principals’. As the interests of shareholders and directors are prioritised, those of the SLE, other corporate constituencies, and other stakeholders are marginalised (Aglietta and Rebérioux, 2005; Bratton, 1989; Johnson and Millon, 2005; Millon, 2014). To assess these claims, I showed how, in relation to the corporate architecture put in place by the SLE, positing shareholders as a constituency with a right to control or management, and positing boards as directly accountable to shareholders (through residual claims or through contract), can only be seen as the outcome of a conceptual confusion, which presents a highly problematic basis for the development of corporate governance theory and practice, as it fails to explain the specific functions and role of the SLE; the specificity of the corporate institutional structure and the specific privileges and protections it provides to

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shareholders; and the specific position of and role for corporate boards in relation to both a legal and a social quid pro quo that allows for the provision of a social licence to the modern public corporation. I showed how the SLE puts in place the basis for a specific corporate architecture, in which the role, position, and claims of all constituent groups and their relations are fundamentally changed, compared to the traditional unlimited liability partnership model. And although the orientation of fiduciary duties toward the ‘entity’ is problematic as a concrete basis for the identification of a positive content for fiduciary duties, the legal quid pro quo provides the basis for a view of the SLE as the centrepiece of corporate architecture and for the emergence of the board of directors as a central corporate constituency with fiduciary duties toward the ‘entity’ (Johnson and Millon, 2005; Keay and Loughrey, 2015); and hence for a view of the mandate and role of the board as a mediating hierarch between the long-term claims of constituencies on the ‘entity’ (Segrestin and Hatchuel, 2011). The necessity to maintain this role and mandate for the board is related to a legal quid pro quo that is central to the provision of privileges and protections to corporate constituencies and is reinforced by a social quid pro quo that is necessary to provide legitimacy to the ongoing effects of the use of the modern corporation, notably oligopolistic economic organisation. The combination of the legal and the social quid pro quo supports the argument that the duty of a board of directors in a public corporation is to maintain a balance between the rights, claims, obligations and protections of all constituencies inside the corporation and to provide long-term positive and equitable outcomes for broad sets of constituencies, both inside and outside the corporation (Berle and Means, 2007 [1932]; Fayol, 2013 [1949]; Ireland, 2016; Tricker, 2015; Veldman et al, 2016). In relation to the combined legal and social quid pro quo that is necessary to provide legitimacy to the modern corporation, directing corporate directors and officers to act in the exclusive interests of shareholders’ interests and claims is highly problematic. The adoption of this notion of corporate governance leads to the use of the SLE, a construct with a problematic legal and social status and legitimation, in the exclusive service of the shareholders, who present a specific constituent group with strong privileges and protections as a result of the corporate architecture, while the implications of the SLE for all other constituent groups are ignored. It has been argued that the nexus of contracts notion is anachronistic and inaccurate from a legal point of view, leading Millon (2014: 1044) to ponder that ‘the emergence of the agency claim and its widespread embrace as an assumed legal requirement are nothing short of astonishing.’ However, denying the status and effects of the SLE and the architecture it provides; allocating the rewards and protections of the use of the SLE exclusively to shareholders, directors and officers; and shifting the risks of the use of the modern corporation and ­oligopolistic economic organisation to all other constituencies and stakeholders has, arguably, been central to the capacity to extract extensive shortterm gains for the shareholder constituency at the expense of all other corporate

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c­ onstituencies and stakeholders (Jansson et al, 2016; Mayer, 2013; Reich, 2016). As the adoption of a specific theory of corporate governance has concrete outcomes in terms of ­political economy, further exploration of the SLE and of the architecture it puts in place is fundamental to building a progressive corporate governance theory and practice (Veldman et al, 2016).

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4 Dismantling the Legal Myth of Shareholder Primacy: The Corporation as a Sustainable Market Actor BEATE SJÅFJELL*

I.  The Call for Corporate Sustainability The convergence of crises that we face as a global society, with its grand c­ hallenge of how to achieve social progress for all without destroying the very basis of our existence, emphasises the importance of discussing the role of the market actors. We cannot achieve environmental, social and economic sustainability of our societies without the contribution of the market actors.1 The market actors are the businesses of all forms and sizes, investors and financiers, and public entities in their many roles as market actors. In addition to being legislators, regulators and supervisors, public entities are market actors as direct shareholders, as institutional investors through pension funds and (other) sovereign wealth funds, as public procurers and through a variety of public-private partnerships and other hybrids between private and public. The consumers, as we like to refer to people

*  As the Project Coordinator of Sustainable Market Actors for Responsible Trade (SMART) (smart. uio.no), which receives funding from the European Union’s Horizon 2020 research and innovation programme under grant agreement No 693642, I gratefully acknowledge its support. My warmest thanks to Nina Boeger and Charlotte Villiers, for organising the inspiring conference where this ­chapter was presented as a working paper, and to the participants for stimulating discussions, as well as to the SMART team and other colleagues in Norway and abroad for the same, and to Ragnhild Lunner for excellent help with the footnotes. The usual disclaimers apply. Contact e-mail: b.k.sjafjell@ jus.uio.no. 1  In the era of the Anthropocene, sustainability or sustainable development can be defined as ‘development that meets the needs of the present while safeguarding Earth’s life-support system, on which the welfare of current and future generations depends’ (Griggs et al, 2013). Sustainability is used interchangeably with sustainable development in this chapter.

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when they act in the market in pursuit of fulfilment of our personal needs and desires, are also market actors, and integral to our throw-away society (where we forget that there is no ‘away’). With many difficult questions ahead, there is one thing we know for sure: the ‘business as usual’ path market actors in aggregate are on is not an option for ­sustainability; it is a very certain path towards a very uncertain future. The positive achievements that have been made in reaching some of the Millennium Development Goals are bound to be undermined by the degradation of our natural environment including that which is the highly likely result of run-away climate change (UN Millennium Project; Islam 2013). The achievement of the UN Sustainable Development Goals, which (in spite of certain internal contradictions) may be said to epitomise the overarching goals of the global society, is unlikely (UN, 2015). A fundamental transition away from ‘business as usual’ and onto a sustainable path is necessary (Recital 28, Preamble of the UN Sustainable development Goals, 2015). Such a fundamental transition requires sustainable market actors. This chapter focuses on what this means for business and more specifically, for the dominant business form of the corporation.2 In a time where social entrepreneurship in various shapes and sizes receives much (and undoubtedly warranted) attention, whether and how the dominant business form of the corporation fits into a sustainable future also needs to be discussed. This can be rephrased as a question of how to achieve corporate sustainability. Corporate sustainability is here defined as when businesses (or more broadly, market actors) in aggregate create value in a manner that is (a) environmentally sustainable in the sense that it ensures the long-term stability and resilience of the ecosystems that support human life, (b) socially sustainable in the sense that it facilitates the respect and promotion of human rights and of good governance, and (c) economically sustainable in the sense that it satisfies the economic needs necessary for stable and resilient societies (SMART Project). This chapter begins by discussing the role of the corporation in the unsustainable ‘business as usual’ approach, based on the results of the Sustainable Companies Project (Section II), which shows that the main barrier to corporate sustainability is the social norm of shareholder primacy. This norm has become so dominant that it has turned into a legal myth, and corporate sustainability requires a dismantling of this myth. Section III presents a summary of the tentative reform proposal with this aim, while Section IV concludes with reflections on the work that needs to be done, where the mitigation of the legal myth of shareholder primacy is placed in the broader context of the ongoing research project Sustainable Market Actors for Responsible Trade (SMART).

2 This chapter uses ‘corporations’ and ‘companies’, and ‘corporate law’ and ‘company law’ interchangeably.

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II.  The Unsustainability of the Corporation Crossing the boundaries of compartmentalised law and policy that tells us that environmental issues should be left to environmental law, the Sustainable Companies Project analysed corporate law and governance in its investigation of the barriers to and possibilities for a deeper integration of environmental concerns into the decision-making in companies.3 We investigated core company law, through an extensive, comparative analysis of the purpose of the company as a matter of law, and the role and duties of the board. We focused on the concept of the interests of the company to find the scope of the board’s duty and discretion in its supervision and management of the company. The regulation, or lack thereof, of corporate groups also formed part of our investigation (Sjåfjell et al, 2015). We also investigated accounting and auditing law, in a similar comparative approach, allowing us to delve deeply into the area of law where broader societal interests, through so-called non-financial or Corporate Social Responsibility (CSR) reporting, have made inroads (Villiers and Mӓhönen, 2015a). While the focus of the Sustainable Companies Project was on environmental externalities, the results are to a great extent transferable to social externalities. Indeed, the reform proposal based on our work, summarised below in Section III, takes that broader view (Sjåfjell, 2015). In core company law, the possibilities for a shift away from business as usual and onto a sustainable path are larger than we perhaps beforehand had expected. While the mainstream corporate governance debate tends to regard maximisation of shareholder profit as the sole purpose of companies, this is, as a matter of law, to a great extent incorrect, especially understood as society’s purpose with companies in aggregate. While company law in some jurisdictions adheres to shareholder value (the legal concept, which we distinguish from the social norm of shareholder primacy), the underlying rationale for facilitating the corporate form through legislation is always that it is thought to be beneficial for society through its contribution to economic development. No company law system insists on boards focusing only on returns for shareholders. All jurisdictions expect boards to ensure environmental legal compliance. We see this especially clearly in the shareholder value jurisdiction UK, where the Companies Act 2006 expressly stipulates that broader societal concerns, including environmental protection, should be taken into account (Johnston, 2014). The adoption of section 172 in the Companies Act 2006 underlines that the boards as a matter of law are allowed to, and indeed are intended to, balance a broader set of interests in their pursuit of shareholder value. The reform that gave UK company law this codification of its ‘enlightened shareholder value’ has been rightfully criticised as not using the opportunity to challenge the dominance in practice of the shareholder

3 

Sustainable Companies (2010–14), see jus.uio.no/companies under Projects, Completed.

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interests (Johnston, 2014; Tsagas, chapter 7 herein). In our context, it illustrates that not even the shareholder value stronghold of the UK requires a maximisation of shareholder returns. Indeed, company law across jurisdictions allows boards to integrate environmental externalities beyond legal compliance, at least as far as the business case argument allows—that is, as far as the case can be made that this is profitable for the company in the long run. Within the current system, company law on a comparative basis provides considerable latitude to the board, and by extension the management, to shape business in a sustainable manner (Sjåfjell et al, 2015). However, boards generally do not choose environmentally friendly, low carbon options within the realm of the business case, let alone challenge the outer boundaries of the scope to pursue profit in a sustainable manner by going beyond the business case. This is because of the social norm of shareholder primacy. Shareholder primacy (which we, as stated above, use as a concept distinguished from the legal concept of shareholder value), is such a dominant social norm that it has colonised the space which company law has left open for the boards and, by extension, managers (Sjåfjell et al, 2015). This has been made possible through the support of management remuneration incentives and other economic drivers, and informed by postulates from economic theories stipulating that board and senior managers are the ‘agents’ of the shareholders and should maximise returns to shareholders as measured by the current share price (Sjåfjell, 2010). In their most simplistic form, these postulates equate maximisation of returns to shareholders with increase in societal welfare (Hansman and Kraakman, 2000–01; Yang, 2013). The assumption that maximising shareholder interests is for the good of all involved and for society in general, is based on the theoretical idea of shareholders’ ‘residual interest’, that they will only get profit after other obligations are met. This faulty assumption has been strongly and repeatedly criticised (Sjåfjell, 2009; ­Johnston, 2009; Aglietta and Rebérioux, 2005). Nevertheless, these ideas have become so entrenched that the social norm of shareholder primacy has turned into a legal myth, along with that of shareholders as ‘owners’ of the corporation (Ireland, 1992; Ireland, chapter 1 herein). Arguably, parts of the legal, economic and management scholarship have to a certain extent contributed to a lack of clarity and reinforced these legal myths by not consistently distinguishing between the legal norms and the social norms, between what the law mandates or allows and what is common practice due to the de facto enforcement of shareholders’ interests through the power contained in the organisational and control rights that shareholders have according to the law. ‘Shareholder value’ and ‘shareholder primacy’ are used interchangeably and it is often unclear when these are used as legal norms, as a description of current practices in business and finance, and as normative arguments for what should be mitigated or reinforced (depending on the point of view of the author) (Keay, 2009; Stout, 2013). Distinguishing between legal and social norms is not an exercise rendering clear-cut answers. Indeed, in this dynamic area with multiple interactions between

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legal and social norms as but two of the regulatory modalities (Sjåfjell and Taylor, 2015), there may be a considerable variety of perceptions of what are obvious black-letter legal requirements that may be enforced and what are social norms with no legal enforcement (see Hart, 1994). The position here is not to argue that there is a clear line to be drawn between legal and social norms (nor even that there is full agreement on defining what is law and what are social norms). On the contrary, we see how the law lends support to the social norm of shareholder primacy and how, albeit to a lesser degree, it reinforces the competing social norms of corporate social responsibility and stewardship. Social norms may over time achieve such a position that they become customary law, and social norms may inform legislative initiatives through which they are transformed into black-letter law. And legal norms may spark the development of new social norms (Elster, 2007: 358–59). It is exactly these dynamic interconnections that emphasise the importance of distinguishing between the social norm of shareholder primacy and the legal norms of corporate purpose and corporate interests (on their sliding scale from shareholder value to the pluralistic interest of the enterprise). Identifying the social norm of shareholder primacy as an extreme that is not supported by corporate law is arguably a necessary step to reduce the risk of the final takeover where shareholder primacy moves from being a social norm that has become a legal myth to being accepted and included in future legislative reforms as black-letter law. Taking this position, that the social norm of shareholder primacy must be identified and mitigated, is informed by the detrimental effect we see in practice of shareholder primacy: an extremely narrow and short-termistic focus on maximisation of returns. It is detrimental to business by presupposing an artificial dichotomy between economic profit and all other concerns, and thereby leading to boards ignoring the growing financial (and other) risks of ‘business as usual’ (Barker, 2015). This is negative for employees, for workers along supply chains and for broader societal interests because it unduly narrows the scope of interests to be integrated into corporate decision-making (Sjåfjell, 2011). It is also harmful to all shareholders that do not have an extreme short-term perspective, including institutional investors, and in particular those that per definition are meant to have a long-term perspective because they are intended to provide pensions for future generations of retirees (Millon, 2013). The barrier to corporate sustainability posed by the shareholder primacy norm is exacerbated by the chasm between company law’s approach to corporate groups and the dominance and practice of such groups. While companies are ‘creatures of national law’, corporate groups are international, making a holistic regulation of heterogeneous groups across national borders extremely difficult. The parent company’s tight control of the group in practice is perversely matched by the limited legal possibilities for holding the parent company liable for subsidiaries’ environmental and social transgressions (Sjåfjell et al, 2015; Anker-Sørensen, 2014). Shareholder primacy therefore has especially fertile grounds in the corporate groups that dominate transnational business, and through ­financial engineering,

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the extent of the corporate control in corporate groups and corporate and contractual networks may be difficult to identify, let alone mitigate (AnkerSørensen, 2016). After the financial crisis of 2007–08, the EU Commission recognised shorttermism as a negative driver (European Commission, 2014). The EU is increasingly also calling for more sustainable business and finance (see eg European Commission, 2016). However, the EU Commission does not identify shareholder primacy as a cause; rather it wishes to encourage shareholders to be more active and to be so in a long-term and sustainability-oriented way. That the EU is informed by the same forces underpinning shareholder primacy is also evident in that only nudging of shareholders appears to be considered acceptable, as the most recent reform of the Shareholder Rights Directive illustrates. Asking institutional investors to publish their investment policy in a comply-or-explain approach was the extent of the duties that the EU, after long negotiations, was willing to impose on shareholders.4 An increasing number of thought leaders in business and finance appear to see the need to shift towards sustainability (although often being less clear on actually shifting away from business as usual) (World Business Council for Sustainable Development). Encouraging reports even claim that a majority of investors are prepared to make sustainability integral to their decision-making, although what they perceive as sustainable and to what extent they are prepared to make investment decisions on this basis is often unclear (MIT Sloan Report). If we assume that investors are prepared to be part of a transition to sustainability, the informational basis from corporations needs to be in place. To facilitate this and to gradually internalise environmental and social concerns in the corporate decision-making (based on theories of reflexive law) (Johnston, 2009), so-called non-financial or CSR reporting has become a regulatory tool of choice not only for the EU but also for national legislators world-wide. However, the Sustainable Companies Project’s multijurisdictional comparative analysis of the reporting requirements indicates that these legislative initiatives are strikingly insufficient in influencing companies

4  Shareholder Rights Directive, Amendments adopted by the European Parliament on 8 July 2015 on the proposal for a directive of the European Parliament and of the Council amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement and Directive 2013/34/EU as regards certain elements of the corporate governance statement (COM(2014)0213— C7-0147/2014—2014/0121(COD)), Art 2 h. The reform of the EU Directive on institutions for occupational retirement provision (IORP) goes in the same direction; Dir 2003/41/EC of the European Parliament and of the Council 3 June 2003 on the activities and supervision of institutions for occupational retirement provision (IORP Dir). On 30 June 2016, the European Parliament, the Council and the European Commission agreed on the text of a revision of the IORP Dir, known as IORP2, based on a Commission proposal 27 March 2014. The new Directive was expected to be adopted formally by the European Parliament and the Council before the end of 2016. No official text is available yet; see www.ec.europa.eu/finance/pensions/iorp/index_en.htm. See for a relatively positive evaluation, I Chiu and D Katelouzou (2017) and for a more critical one, B Sjåfjell (2017).

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and their investors. This fails already from the beginning: much reporting remains left to voluntary and discretionary measures, leading to risks of corporate capture, lack of comparability, lack of consistency and uncertainty in benchmarking. Notably, the new EU non-financial reporting requirements, while a step in the right direction, lack the scope and the necessary verification requirements to be a real game-changer (Villiers and Mӓhönen, 2015b).

III.  The Necessary Reform of the Corporation In taking over the discretionary space that corporate law gives corporations and their boards, shareholder primacy has pushed out the corporate law understanding of why we have corporations and what the role and duties of the board are. It has on an aggregate level (and with all due respect to businesses for all the good that they also do) turned the corporation into a simplistic engine of destruction. To mitigate this social norm turned legal myth of shareholder primacy, we need to go beyond explicitly permitting other issues than that of economic profit to be taken into account (eg, section 172, Companies Act 2006; Johnston, 2009) or encouraging shareholders to be long-term and sustainability-oriented in their approach, eg through reform of the EU Shareholders’ Directive, or hoping through reflexive law approaches to nudge the boards into pushing aside the domination of shareholder interests and internalising broader societal issues. To push back against this legal myth, a firm and clear legal norm is needed. In light of the urgency of the convergence of crises we face as a global society, a legislative repossession of the definition of the corporate purpose and the role and duties of the board need also to go further than reinstating the original corporate law concepts on the sliding scale from the ‘enlightened’ shareholder value of the UK (Jensen, 2002) to the pluralistic understanding of the interests of the company in much of the rest of Europe (Sjåfjell et al, 2015). We need a corporate law that is fit for purpose in the twenty-first century. A first step is to acknowledge the severity of the challenges and formulate the overarching goal that we wish to achieve. The grand challenge of our time may be formulated as that of achieving a safe and just operating space for humanity: of securing the social foundation for humanity now and in the future while staying within planetary boundaries (Leach et al, 2013). If we are to achieve this, we cannot continue with incremental improvements; neither can we focus on whichever environmental or social challenges are given the most attention at any one time. The concept of planetary boundaries, state-of-the-art natural science (Rockström et al, 2009), embodies this fundamental recognition of planet-level environmental dynamics presenting non-negotiable ecological limits, which should form the space within which all economic and social development is to take place.

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The fundamental recognition of ecological limits may be found expressed in the EU’s Seventh Environment Action Programme ‘Living well, within the limits of our planet’, where this vision is formulated: In 2050, we live well, within the planet’s ecological limits. Our prosperity and healthy environment stem from an innovative, circular economy where nothing is wasted and where natural resources are managed sustainably, and biodiversity is protected, valued and restored in ways that enhance our society’s resilience. Our low-carbon growth has long been decoupled from resource use, setting the pace for a safe and sustainable global society. (Environment Action programme to 2020)

Planetary boundaries as a term used for the limits of our planet is the result of the work of an international multidisciplinary group of environmental scientists, who in 2009 pooled their knowledge of different Earth system processes to inform the world about the space for sustainable action within planetary boundaries ­(Cornell, unpublished; Rockström, 2009; Steffen et al, 2015). Their work reflects the growing scientific understanding that life and its physical environment co-evolve. This pioneering effort brought together evidence of rising and interconnected global risks in several different contexts where environmental processes are being changed by human activities. The planetary boundaries framework flags a set of sustainability-critical issues. It gives a dashboard of issues where our collective humanity is changing the fundamental dynamics of the Earth system most profoundly (Cornell). Through this work it is estimated that humanity has already transgressed or is at risk of transgressing at least four of the currently identified nine planetary boundaries, including climate change, biosphere integrity, biogeochemical flows and land-system integrity.5 The planetary boundaries work is a continuous natural science work-in-progress, as scientists gradually understand more of the complex interactions and feedback mechanisms in the global ecological systems (Hӓyhӓa et al, 2016). Planetary boundaries as a concept forms the rationale by which new boundaries may be identified and better quantifications or metrics adopted. In line with this, the conceptual framework for planetary boundaries itself proposes a strongly precautionary approach, by ‘setting the discrete boundary value at the lower and more conservative bound of the uncertainty range’ (Rockström et al, 2009). Transplanting the concept of planetary boundaries into company law and thereby into corporate governance has the potential of significance on three ­levels: first and most importantly, it brings to the forefront that there are ecological limits (conversely, that being perceived as ‘environmentally friendly’ is totally inadequate). Second, it highlights the complex interaction between planet-level environmental processes and that for example climate change, however topical

5  The other five being global freshwater use, ocean acidification, atmospheric aerosol loading, stratospheric ozone depletion, and cycling of phosphorus and nitrogen; Steffen et al, 2015.

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(and difficult to mitigate), is only one aspect of the convergence of crises we are heading directly into. Third, it continuously reminds us that state-of-the-art natural science must continue to inform our decisions on a work-in-progress-basis. For corporate decision-makers it therefore should stress the unacceptability of ignorance (Barker, 2015) in the face of these severe environmental risks and the necessity of a knowledge-based precautionary approach. To operationalise this understanding in EU company law a first measure could be to redefine the purpose of companies, for example in an EU company law directive, in this way: The purpose of a company is to create sustainable value within planetary boundaries while respecting the interests of its investors and other involved parties.

The fundamental key issues here are, on the one hand, the purpose of creating ‘sustainable value’ and, on the other hand, the space within which value can be created; that is, ‘within planetary boundaries’. To develop this idea into a proper legislative proposal, the concept of ‘sustainable value’ must be given content in, eg, the directive’s explanatory notes. The basic idea is that ‘sustainable value’ is long-term and inclusive and stands in opposition to short-term pursuit of shareholder returns. Protection and promotion of the interest of the shareholders, other investors and other involved parties, including employees, creditors and other contractual parties, is encompassed through the formulation that sustainable value is to be sought ‘while respecting the interest of its investors and other involved parties’. Broader societal impact can also be included in the concepts of ‘sustainable value’ and ‘other involved parties’ depending on how this is defined in explanatory notes and implemented, interpreted and put into practice. It can also be included in the text of the provision itself. The ultimate goal remains to achieve not only a safe operating space for humanity but a safe and just space for humanity (Leach et al, 2013). The concept of ‘within planetary boundaries’ clearly signals that these are non-negotiable ecological limits where the room for trade-offs is limited. Including this in a redefined purpose of the corporation is just the first step. The uncertainty of how to translate planetary boundaries into meaningful boundaries for the individual business, combined with the limiting effect of the shareholder ­primacy norm, could easily lead to ‘planetary boundaries’ either being ignored or given lip service through introducing the language of planetary boundaries into current often non-relevant and non-reliable environmental statements on websites and in management reports. To operationalise planetary boundaries as a part of a redefined purpose, it must be integrated into the duties of the board, clearly and enforceably. As the European Commission has observed, boards have a ‘vital part to play in the development of responsible companies’ (European Commission, 2011a) and businesses should: have in place a process to integrate social, environmental, ethical, human rights and consumer concerns into their business operations and core strategy in close collaboration with their stakeholders, with the aim of: maximising the creation of shared value for their

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owners/shareholders and for their other stakeholders and society at large; and identifying, preventing and mitigating their possible adverse impacts (European Commission, 2011b).

The OECD Guidelines for Multinational Enterprises also support the formulation of such duties (OECD Guidelines). The duties of the board could for example be reformulated as follows: The board of the company is to ensure the creation of sustainable value within planetary boundaries. To this end, the board shall adopt and regularly revise a long-term Sustainable Business Plan for the company, based on an assessment of the company’s main areas of business that covers the full life of its products, services and processes.

The operationalisation of the board’s duty is the Sustainable Business Plan, which entails drawing up a long-term plan for the company. The Sustainable Business Plan should outline how the company will create value within planetary boundaries in an assessment of the full life of its products, services and processes, which can be done through an economic, environmental and social life-cycle assessment. The increasing focus on the use of economic, environmental and social due diligence, a key mechanism both in the UN Guiding Principles on Business and Human Rights and in the OECD Guidelines on Multinational Enterprises, is in line with the approach suggested here. Due diligence, and risk assessment and management, should be based on a full overview of the products, services and processes of the business of the company, and not limited to isolated phases or aspects. A full life-cycle assessment to identify and mitigate negative economic, environmental and social impacts would have to be undertaken for any products the company sells or services it offers, either by the company itself or by the manufacturer/supplier. This would be a way of dealing with the fragmentation of responsibility for negative economic, environmental and social impacts that we see today through multinational groups of companies and transnational contractual chains. Any European company would need to draw up its own Sustainable Business Plan or substantiate that this was included, for example, within a parent company’s Sustainable Business Plan (Sjåfjell, 2015). The Sustainable Business Plan should include milestones or objectives to be achieved along the way and key performance indicators (KPIs) for those impacts that are quantifiable. These will then form the basis for relevant annual reporting by a company. The long-term plan should be broken down into shorter time segments, requiring a company, at these regular intervals, to undertake a full assessment of its Sustainable Business Plan and consider necessary revisions. A mandatory table of contents of the Sustainable Business Plan should be drawn up as an annex to the directive to encourage proper compliance and comparability between companies. Guidelines, endorsed by the European Commission, should set out how the relevant and sufficient KPIs are to be selected according to the ­sector and concrete Sustainable Business Plan of the company. The selection of KPIs should be verified by external experts, to ensure their relevance and adequacy,

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as should the annual reporting on these KPIs, to ensure the information’s reliability. Together this would ensure the relevance and reliability of the information, giving investors, contractual parties, consumers and public bodies a verified informational basis for their relationship with the corporations. A requirement for such a Sustainable Business Plan, designed thoughtfully, would involve a standardisation of a process that companies wishing to achieve long-term sustainable value would need to do anyway. The standardisation would contribute to lowering costs and establishing a level playing field (Sjåfjell, 2015). The requirements for a Sustainable Business Plan, identification of KPIs for the quantifiable aspects and the annual reporting on these, could be shaped in such a way as to give content to and realise the potential of the EU’s non-financial reporting rules of 2014 (Sjåfjell, 2016). To support such a redefinition of the role and duties of the board, the role and duties of the general meeting should also be included. A comprehensive legal reform could include a general clause to stipulate that the general meeting should in all its decisions promote the overarching purpose of the company; that is to create sustainable value within planetary boundaries while respecting the interests of its investors and other involved parties. It could specifically state that the general meeting’s decisions concerning the board (and by extension the management of the company), should support the board in its duty to ensure the creation of sustainable value within planetary boundaries. The general clause that several jurisdictions have, setting out that the general meeting must not make decisions that go unfairly to the detriment of the company or of other shareholders, could be included in an EU directive, to make it generally applicable, and be broadened to state that the general meeting cannot make decisions that work against the company’s ability to create sustainable value within planetary boundaries (Sjåfjell, 2017a, see also Sjåfjell 2017b). This proposal, with its life-cycle focus on the products and services that businesses offer, fits well with the integrated product policy of the EU where the lifecycle perspective is identified as the leading principle. It also fits with the public procurement reform, where life-cycle costing is an important approach to including broader concerns. The requirement for a Sustainable Business Plan set out here could be integrated in other areas of law as well, forming a touch stone for further reinforcement and facilitation of the transformation of the corporation. Examples include public procurement law and financial market law (Sjåfjell, 2016). For such a comprehensive reform to be both politically feasible and effective, it would have to find the right balance between allowing companies the flexibility and scope that they need in the different sectors and in accordance with their size, location and individual business aim, while keeping an appropriate mix of smart regulation with some binding rules and enforcement requirements. Aspects that should be kept mandatory and enforced include that of the actual drawing up of the Sustainable Business Plan, and of external expert verification of the main steps of selecting relevant KPIs and the annual reporting on these. With appropriate guidelines and sector-wise standardisation, this should not be too

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burdensome, while offering substantial benefits to the companies in the form of identifying inefficiencies and various types of risks, allowing the companies to enhance the efficiency and risk management of their processes and (often global) value chains. Political feasibility would probably also require at least some support from the electorate and from thought leaders in business and finance. It is encouraging to see that there already are business attempts at identifying how the natural science on planetary boundaries can be broken down into sector, company and product level boundaries (Kerkhof et al). A way forward may be through pilot projects where an interdisciplinary group of scientists and scholars work together with businesses willing to be frontrunners.6

IV.  Conclusion and Outlook: A Broader and Systemic Analysis is Required The tentative proposal presented above is arguably a key to transforming the corporation into a sustainable market actor. However, that is just the beginning of the debate and not its conclusion. There a number of other significant actors involved and many unresolved issues. The market actors, notably business and finance, are expected to play the role of drivers of value creation and innovation in the urgent and necessary transition of our systems of production and consumption onto a sustainable path (eg Recital 28 in the Preamble of the UN Sustainable Development Goals, 2015). There appears to be no lack of sustainability-oriented language from businesses, investors and public bodies. Reports and assessments of businesses and their products and services are often easily available online, which in theory should facilitate sustainability-oriented choices by both investors and consumers. Unfortunately, we are, in spite of all this sustainability language, still on the unsustainable path of ‘business as usual’. It is often difficult to distinguish between misleading marketing and greenwashing, and relevant, reliable and verified information. In a system where it is still perfectly possible for ‘non-financial’, CSR or sustainability reporting to be left to the marketing department, without much link to the business of the company, it may be economically irrational for companies to wish to report meaningfully and transparently on these issues. Under pressure of short-term requirements for financial return, purportedly sustainable investors, too, may find themselves trapped in a system that works against long-term investment. Companies see that the competitive advantage lies with the market actors who exploit the possibilities of externalising the costs of environmental, social and economic impacts through opaque corporate group structures and contractual networks. 6 

The SMART project is currently investigating the possibility for such pilots.

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The Panama Papers revelations indicate a system of business and finance, involving the whole range of market actors from private individuals to public entities, which seems to have lost sight of any societal goals and respect for compliance with the law and with generally accepted ethical norms (Panama Papers). The frenzy of short-term maximisation of returns for shareholders, and the social norm of shareholder primacy that constrains the possibilities for corporations to shift over onto a sustainable path, seem to be indicative of an entire economic system that has gone awry. With the pervasive issue of inequality across and within nations informing socio-political responses such as the vote for the UK to leave to the EU and the rise of far-right extremism on both sides of the Atlantic, the systemic fault lines are starting to show also in the richer parts of the world ­(Hawking, 2016). Meeting the grand challenge of our time thereby calls for a broader and systemic analysis, one that encompasses the recognition that we cannot regulate through law alone, nor leave sustainability to the markets. An approach to undertake such analysis is that of ‘regulatory ecology’ (Sjåfjell and Taylor, 2015). ‘Regulatory ecology’ denotes a systemic approach to understanding compliance in which the effectiveness of a rule is a function of the interaction of a subject of regulation with a complex ecology of direct and indirect modes of regulation: law, social norms, markets and ‘architecture’, the regulatory impact of the physical world, for example that of the technology enabling high-frequency trading (ibid). The entire regulatory complexity of the market actors, from the macro level of international law and policy, to the micro level of contractual clauses in supply chains, needs to be analysed to identify barriers to and possibilities for the shift to sustainability, and the gaps and incoherencies in current regulatory approaches. These are issues with which the H2020-funded project Sustainable Market Actors for Responsible Trade (SMART, 2016–20) is engaging. The aim is to realise the enormous potential that lies in stimulating policy coherence for sustainability, achieving sustainable market actors and setting us onto pathways to a safe and just operating space for humanity.

References Aglietta, MI and Rebérioux, A (2005) Corporate Governance Adrift. A Critique of Shareholder Value (Cheltenham, Edward Elgar). Anker-Sørensen, L (2016) ‘Financial Engineering as an Alternative Veil for the Corporate Group’ 13(5) European Company Law. Available at SSRN: www.ssrn. com/abstract=2729112. —— (2014) ‘Parental Liability for Externalities of Subsidiaries: Domestic and Extraterritorial Approaches’ 3(3) Dovenschmidt Quarterly 102. Barker, S (2015) ‘Directors’ Personal Liability for Corporate Inaction on Climate Change’ 67(1) Governance Directions 21.

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Chiu, I, and Katelouzou, D (2017) ‘From Shareholder Stewardship to Shareholder Duties: Is the Time Ripe?’ in HS Birkmose (ed), Shareholders’ Duties in Europe (Alphen aan den Rijn, Kluwer Law International). Cornell, S ‘Planetary Boundaries and Business: putting the operating into the Safe Operating Space for Humanity’ (draft paper on file with current author). Directive 2003/41/EC of the European Parliament and of the Council 3 June 2003 on the activities and supervision of institutions for occupational retirement provision (IORP Directive). On 30 June 2016, the European Parliament, the Council and the European Commission agreed on the text of a revision of the IORP Directive, known as IORP2, based on a Commission proposal 27 March 2014. Elster, J (2007) Explaining Social Behavior: More Nuts and Bolts for the Social Sciences (Cambridge, Cambridge University Press, 2007). Environment Action Programme to 2020, Decision No 1386/2013/EU of the European Parliament and of the Council of 20 November 2013 on a General Union Environment Action Programme to 2020 ‘Living well, within the limits of our planet’, OJ L 354, 28.12.2013, 171–200. European Commission appoints members of the High-Level Expert Group on sustainable finance, Brussels, 22 December 2016: ‘The EU is fully committed to mainstreaming sustainability in its policies and cross-cutting initiatives. Providing sustainable finance for investments that lead to a more sustainable economy is therefore essential’, EU Commission, www.europa.eu/rapid/ press-release_IP-16-4502_en.htm. European Commission Press Release, 9 April 2014, 1, www.europa.eu/rapid/ press-release_IP-14-396_en.htm. European Commission (2011a) Green Paper—The EU corporate governance framework, COM (2011) 164 final, at 5. European Commission (2011b) ‘A Renewed EU Strategy 2011–14 for Corporate Social Responsibility, COM (2011) 681 final, at 6. Griggs, D et al, ‘Policy: Sustainable Development Goals for People and Planet’ (2013) 495 Nature 305, available at www.nature.com/nature/journal/v495/ n7441/full/495305a.html. Hansman, H, and Kraakman, R (2000–01) ‘The End of History for Corporate Law’ 89 Georgetown Law Journal 441. Hart, HLA (1994) The Concept of Law 2nd edition (Oxford, Oxford University Press). Hawking, S (2016) ‘This is the most dangerous time for our planet’ The Guardian 1 December 2016, available at www.theguardian.com/commentisfree/2016/ dec/01/stephen-hawking-dangerous-time-planet-inequality. Häyhäa, T, Lucas, PL, van Vuuren, DP, Cornell, SE, Hoff, H (2016) ‘From Planetary Boundaries to National Fair Shares of the Global Safe Operating Space—How can the Scales be Bridged?’ 40 Global Environmental Change 60. Ireland, P, Chapter 1 in this volume.

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—— (1999) ‘Company Law and the Myth of Shareholder Ownership’ 62 Modern Law Review 32. Islam, S (2013) Climate Change Threatens Bangladesh’s MDG Achievements— Experts, http://news.trust.org//item/20130722163326-vjgux/. Jensen, MC (2002) ‘Value Maximization, Stakeholder Theory, and the Corporate Objective Function’ in J Andriof et al (eds), Unfolding Stakeholder Thinking: Theory, Responsibility and Engagement (Sheffield, Greenleaf Publishing). Johnston, A (2009) EC Regulation of Corporate Governance (Cambridge, Cambridge University Press). —— (2014) ‘Reforming English Company Law to Promote Sustainable Companies’ 11 European Company Law 63. Keay, AR, (2009) ‘Shareholder Primacy in Corporate Law: Can it Survive? Should it Survive?’ (1 November 2009), available at SSRN: www.ssrn.com/ abstract=1498065. Kerkhof, AK, de Boer, E, Meijer, G, Scheepmaker, J, Blok, K, ‘Towards Companies that Perform within the Earth’s Regenerative Capacity’, paper from One Planet Thinking, at www.ecofys.com/en/news/new-methodology-to-help-companiesoperate-within-natural-resource-limits-of/. Leach, M, Raworth, K and Rockström, J (2013) ‘Between Social and Planetary Boundaries: Navigating Pathways in the Safe and Just Pathway for Humanity’, World Social Science Report 2013: Changing Global Environments, 84–90 (OECD) available at: www.worldsocialscience.org/activities/world-social-science-report/ the-2013-report/. Millon, D (2013) ‘Shareholder Social Responsibility’ 36(2) Seattle University Law Review 911. MITSloan report ‘Investing for a Sustainable Future: Investors Care More About Sustainability than Many Executives Believe’; summary available here: www. sloanreview.mit.edu/projects/investing-for-a-sustainable-future/. OECD Guidelines, see www.oecd.org/corporate/mne/. Preamble of the UN Sustainable Development Goals (2015) UN General Assembly resolution 70/1, Transforming Our World: The 2030 Agenda For Sustainable Development, A/RES/70/1, (25 September 2015) www.undocs.org/A/RES/70/1. Rockström J et al (2009) ‘Planetary Boundaries: Exploring the Safe Operating Space for Humanity’ 14(2) Ecology and Society, available at www.ecologyandsociety. org/vol14/iss2/art32/, and updated and revised in W Steffen et al, ‘Planetary Boundaries: Guiding Human Development on a Changing Planet’ (2015) 347(6223) Science, available at www.sciencemag.org/content/347/6223/1259855. abstract. Shareholder Rights Directive, Amendments adopted by the European Parliament on 8 July 2015 on the proposal for a directive of the European Parliament and of the Council amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement and Directive 2013/34/EU as regards certain elements of the corporate governance statement (COM(2014)0213— C7-0147/2014—2014/0121(COD)), Article 2 h.

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Sjåfjell, B (2017a) ‘Achieving Corporate Sustainability: What is the role of the shareholder?’ in HS Birkmose (ed), Shareholders’ duties in Europe (Alphen aan den Rijn, Kluwer Law International). —— (2017b) ‘When the Solution Becomes the Problem: The Triple Failure of Corporate Governance Codes’ in JJ Du Plessis and CK Low (eds), Corporate Governance Codes for the 21st Century: International Perspectives and Critical Analyses (Cham, Springer International Publishing). —— (2016a) ‘Bridge Over Troubled Water: Corporate Law Reform for Life-Cycle Based Governance and Reporting’ (2016) University of Oslo Faculty of Law Research Paper No 2016-23. Available at SSRN: www.ssrn.com/abstract=2874270. —— (2016b) ‘Sustainable Public Procurement as a Driver for Sustainable Companies? The Interface between Company Law and Public Procurement Law’ in B Sjåfjell and A Wiesbrock, Sustainable Public Procurement under EU Law: New Perspectives on the State as Stakeholder (Cambridge, Cambridge University Press). —— (2015) ‘Corporate Governance for Sustainability: the Necessary Reform of EU Company Law’ in B Sjåfjell and A Wiesbrock (eds), The Greening of European Business under EU Law: Taking Article 11 TFEU Seriously (Abingdon, Routledge). —— (2011) ‘The Core of Corporate Governance: Implications of the Takeover Directive for Corporate Governance in Europe’ 22(5) European Business Law Review 64, available at SSRN: www.ssrn.com/abstract=1598298. —— (2010) ‘More than Meets the Eye: Law and Economics in Modern Company Law’ in E Røsæg, HB Schäfer and E Stavang (eds), Law and Economics. Essays in Honour of Erling Eide (Oslo, Cappelen Akademisk). —— (2009) Towards a Sustainable European Company Law: a Normative Analysis of the Objectives of EU Law, with the Takeover Directive as a Test Case, European company law series vol 3 (Alphen aan den Rijn, Kluwer Law International). Sjåfjell, B and Taylor, MB (2015) ‘Planetary Boundaries and Company Law: Towards a Regulatory Ecology of Corporate Sustainability’ University of Oslo Faculty of Law Research Paper No 2015-11, available at SSRN: www.ssrn.com/ abstract=2610583. Sjåfjell, B et al (2015) ‘Shareholder Primacy: The Main Barrier to Sustainable Companies’, in B Sjåfjell and BJ Richardson (eds), Company Law and Sustainability: Legal Barriers and Opportunities (Cambridge, Cambridge University Press). The SMART Project, Sustainable Market Actors for Responsible Trade, 2016-2020 (smart.uio.no). funded under the European Union’s Horizon 2020 research and innovation programme (Grant Agreement No 693642). Stout, LA (2013) ‘The Shareholder Value Myth’ April-May European Financial Review available at SSRN: www.ssrn.com/abstract=2277141. The Sustainable Companies Project, 2010-2014 (jus.uio.no/companies under Projects, Completed), funded by the Research Council of Norway. The Panama Papers, www.panamapapers.icij.org.

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Tsagas, G, Chapter 7 in this volume. United Nations Sustainable Development Goals: UN General Assembly resolution 70/1, Transforming Our World: The 2030 Agenda for Sustainable Development, A/RES/70/1 (25 September 2015) available at: www.undocs.org/A/RES/70/1. Villiers, C, and Mähönen, J (2015a) ‘Accounting, Auditing and Reporting: Supporting or Obstructing the Sustainable Companies Objective?’ in B Sjåfjell and BJ Richardson (eds), Company Law and Sustainability (Cambridge, Cambridge University Press). —— and —— (2015b) ‘Article 11: Integrated Reporting or Non-Financial Reporting?’ in B Sjåfjell and A Wiesbrock, The Greening of European Business under EU Law (Abingdon, Routledge). World Business Council for Sustainable Development, www.wbcsd.org/Overview/ Our-approach, and the SDG Business Hub, available at www.sdghub.com. www.ec.europa.eu/finance/pensions/iorp/index_en.htm. www.unmillenniumproject.org/goals/. Yang, JL (2013) ‘Maximizing Shareholder Value: The Goal that Changed Corporate America’ Washington Post (online), 26 August 2013, www.washingtonpost.com/.

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I.  Climate Change Uncertainties There are some things we know. Humans live on Earth; they do not live on Venus. They do so because they are suited to the Earth’s climate. We know that the Earth’s climate is changing—humans are changing it—and it will continue to do so unless forceful action is taken. Moreover, this action needs to take place within a fairly well known period of time—there is a strong scientific consensus that the period until the 2040s is crucial (IPCC, 2013). There are many possible actions, some of which are in train: some will enable people to combat climate change; others will lead to society being transformed by climate change. We also know that climate change will affect some of society’s most fundamental principles and institutions. This chapter emphasises the consequences for business, but climate change also has implications for international governance (achieving binding international agreements has been at the heart of climate negotiations since the 1990s), economics (in particular the centrality of growth to mainstream economic policy), and consumption (the globalisation of consumption as a social norm and economic right). In each case, the implications of climate change are not trivial: as we will see, they strike at the heart of some of society’s most basic and unquestioned assumptions about what is a good life. There are also things we do not know. Climate change deniers are wrong about the changing climate (there is no compelling evidence that it is anything but a real phenomenon); but they are right on one thing: there are many aspects of climate change about which we are ignorant. We do not know, for instance, all of the actions that should or can be taken in relation to climate change, either because the necessary innovation has yet to happen, or because we do not know what actions will be effective and plausible in a world filled with competing demands (eg the demand for economic growth versus the need to reduce carbon emissions). Also, we do not know how long some key initiatives will take to implement—an important knowledge gap given that in many instances one of the things that determines

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if an action is effective or not is when it is undertaken. For example, a fivemetre-high flood wall to combat rising sea levels could be very effective if built by 2020, but useless if built by 2040 when sea surges might require a higher wall. Of course, we are not completely blind nor ignorant. Many actions have already been taken. The 2016 Paris Agreement, part of the United Nations Framework Convention on Climate Change, which countries ratified in record time, commits governments to action to combat climate change. Carbon emissions trading has spread from Europe to China, South Korea, New Zealand and beyond. The Carbon Disclosure Project provides investors with unparalleled information on the carbon emissions of companies, cities and states. Some might even argue that there are too many initiatives, evident for instance in the setting up of the Task Force on Climate-related Financial Disclosures to move from the current 400 or so disclosure regimes to a consistent model. However, we do not know how effective these actions will be. We do not know because they are new or have long-term goals. We also do not know if these actions are comprehensive enough, and what will happen if, for instance, there is innovation in financial disclosures in the major commercial centres of the world, but nothing is done to address the challenges of the majority of businesses in the world, ie the vast number of enterprises that are small and often in the unregulated informal economy. We also know that some initiatives are not working properly. For example, of the $14.1 billion approved climate finance, only three percent is allocated to decentralised energy, even though this is the most important source of energy for 15 per cent of the world’s population (Rai and Best, 2016). In summary, we know that climate change requires transformation, and we know some of the actions needed. But we also know that the actions being undertaken are insufficient either to prevent rises in global average temperatures by more than 1.5oC or to deal with the social consequences of rises beyond 2oC, the point at which catastrophic climate change is reckoned to become a reality. ­Furthermore, we do not know with any certainty if the current initiatives will work, and we are ignorant as to what approaches will be most effective.

II.  Business and Climate Change The above uncertainties are very important for business because our current models of management, governance and finance all have their roots in the preclimate change era. If one dates modern business back to the industrial revolution, then value has been created by taking a raw material and incrementally adding value to it through processing, manufacturing, marketing etc. The only limits to creating value were the capacity to extract raw materials and the size of the consumer market. Business-related legislation from ownership to labour laws to investment were all built around assumptions about infinite production, consumption and growth.

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That era may well have passed. We say ‘may’ because the thrust of climate change policies worldwide is that society can combat climate change with a modified business-as-usual approach. For most of this chapter, we argue that this modified business-as-usual (BAU) approach will not work, but it is important to be aware of because it is a pervasive assumption in climate change policy. Two core elements of modified BAU policies are to do with energy and economic growth. It is assumed that climate change can be addressed if fossil fuels are replaced with low carbon or renewable energy. If this is achieved, moreover, business and economic life in general can go on as before without the need for changes in consumption patterns, stringent limits on resource use and other types of interference with the market. The market is part of the second core element to modified BAU policies. The bulk of economists hold as an axiomatic truth that markets allocate finite resources most efficiently, hence the emergence of carbon markets around the world (Bowen and Hepburn, 2014). The advantage of framing climate change as an energy or economic challenge is that it does not require radical change to established business or economic models. The disadvantage, though, is that the framing is not working. There have been significant and rapid changes in energy generation. Renewable energy has experienced rises in terms of annual growth rates and annual capacity additions since 2005, and now accounts for nearly 20 per cent of global energy consumption (REN21, 2016). However, this is not significantly different to the percentage in 2012 because global growth in energy consumption overall has been greater than the additions from renewables (Rapier, 2016). Yet, despite increased demand for energy, the growth-dependent neoliberal economy is struggling to deliver sustained prosperity and has come under increasing criticism for creating inequality and exclusion (Atkinson and Morelli, 2011; Beinhocker and Hanauer, 2014). Therefore, unless the energy and economic responses to climate change improve significantly in a short space of time, there is good reason to think that business in an era defined by climate change will be different to what we have grown used to. For instance, as the stranded assets movement in accounting has highlighted, the value of booked assets of companies may change. Notably, the valuation of publicly traded oil companies has been shown to include reserves they could not exploit without causing hazardous levels of carbon emissions (HSBC, 2012). ­Climate change will require new forms of accounting so that environmentally damaging aspects of business practice are not dismissed as externalities for which a company has no responsibility. Accounting will need to recognise that what in a previous era were assets, in a climate changed era are liabilities. However, it will require a raft of other changes as well. For example, risk managers at banks are currently not mandated to include climate change risk in their assessments. This is because their risk horizon is limited to five, at most seven, years. As yet, climate change does not represent a risk to banks over that period. By the time it does, it will probably be too late for the industry to take any meaningful action. Indeed, the Chair of the Bank of England, Mark Carney, has suggested that the finance

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industry may be reaching its ‘Minsky moment’, ie the moment at which financial exposure to a risk is so great that a collapse is inevitable (2016). There are many examples of where climate change poses a risk (recognised or not) to business, or requires new ways of doing business. This latter refers not only to alternative management practices or finance (although both are important): it also concerns the purpose of business, the meaning of value, and the role business plays in society. There are four broad types of approach that characterise how business is thinking about climate change at present.

A.  Type 1: The Cause of Companies’ Rise or Demise Kodak collapsed because digital photography swept away its film business. Olivetti, one of the Europe’s largest companies, was the object for repeated buy-outs once the personal computer pushed the typewriter off of office desks. Climate change could be an equally great threat to some firms and sectors. Industries dependent on fossil fuels might seem the most obvious example, although as the cases of oil and mining show there is little chance that hydrocarbons will vanish from the economy any time soon. However, companies producing gas boilers might want to look over their shoulders at the rise of heating and cooking systems based on renewable energy, and ones vested in centralised electricity grids should be cognisant of the disruptive potential of local grids (Bridge et al, 2013). Equally, there will be climate change equivalents of Intel and Asus during the ICT era, companies who thrived at incumbent companies’ expense because of disruptive change. In relation to the green economy, much was made early on of the potential of renewable energy to create new jobs and wealth, and China is now the world leader in this area (Fankhauser et al, 2013). Looking ahead, industries that can take advantage of low emission manufacturing techniques, distributed production, reuse of materials, and the use of new compounds are all ones that could prosper in a climate changed era. The low-hanging fruit in transforming to a prosperous climate changed society is found when a high emissions, resource intensive industry can be readily substituted with one that is more efficient in terms of energy and other inputs, and yet able to produce equally desirable products and financial returns. The difficulty at present is that the fruit meeting these criteria, such as LED lighting, are rare. There is no shortage of industries such as steel-making or cement where the emissions gains of finding alternatives are obvious. (Cement facilities produce one tonne of carbon emissions for every tonne of cement.) However, there are no readily ­available products that fulfil the same function.

B.  Type 2: The Consumption Challenge The lack of low-hanging fruit where a high-carbon industry can be readily displaced by a low-carbon one in the way that typewriters were once supplanted

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by personal computers is an important reason why businesses often adopt an ­efficiency-based approach to climate change. This means that they treat emissions, water use, energy use and other factors as inputs that can be reduced, recycled or reused. Wal-Mart is an example of this type of approach: over the last decade it has reduced emissions from its vehicle fleet and its stores, and has worked with its suppliers to reduce packaging and improve recycling. Marks & Spencer has taken this a step further with its 100 Plan A commitments setting out what it will achieve by 2020 in order to move in the direction of thinking what a sustainable retail firm will look like. The airline industry has made gains of about a third by reducing aircraft emissions through the use of design, traffic control and fuel innovations (Blowfield and Johnson, 2013). However, in each case, the company/industry itself is promising growth at a rate that means aggregate emissions will increase. The airline industry predicts that total emissions will be higher in 2020 than they were in 2005 even though the emissions per flight will be much lower (ibid). This is because the industry is promising investors a growth in passenger numbers that outstrips its efficiency savings. Of the publicly listed multinational companies, only Unilever has committed itself to decoupling growth in its business from increases in its environmental impact. It is rare for multinational companies to ignore climate change entirely, but many firms adopt flagship initiatives such as powering their stores with renewable energy (IKEA) or cradle-to-cradle product design (Timberland). There is little or no attempt to address the link between climate change and consumption (eg by reducing sales), and instead the assumption is that either carbon efficiency gains will offset any emissions increases from increased sales, or any rise in aggregate emissions can be offset by investments in reforestation, geoengineering and similar carbon extraction initiatives. Just as there are few low hanging fruit because society wants to green what it has rather than radically rethink commercial enterprise in an era of climate change, so too is there a lack of appetite—despite the contradictions inherent to current prominent initiatives—to consider how one might transform business to be congruent with the demands of that era.

C.  Type 3: Unpopular Views and Actions There are schools of thought that argue the obvious conclusion from Examples 1 and 2 above is that capitalism, economic growth and business are each to a greater or lesser degree the main barrier to achieving prosperity in an era of climate change. Klein (2014), Jackson (2009) and Bulkeley and Newell (2015) respectively make these arguments which are very compelling for some people. However, they are also flawed ones. For example, declaring that climate change represents a crisis of capitalism as Klein does, may or may not be true, but it does not point towards a practical way of addressing the consequences of climate change for society or the natural environment. Her theme that capitalism can be replaced with something better is an ideological one that requires us to believe that major ideological shifts equivalent to the one from feudal society to capitalism can be carried out in the

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few decades that climate change modellers have shown are crucial for meaningful action to prevent catastrophic change. Historically, there are no examples of such rapid fundamental change except as a consequence of natural disasters or war. Klein does not argue that we need a large war to sort out climate change, but her failure to take seriously the transformation process from where we are to where we need to be means she is open to that inference. Similarly, those who make the case for prosperity without economic growth do not seriously address how the transformation from a growth-based system to a steady-state economy would take place. How, for example, would existing debts be repaid, and if there was no borrowing with interest (something that is only made possible by growth) how would new hospitals, schools and the new infrastructure of a green economy be funded? According to the Office of National Statistics, UK government debt is £1.6 trillion (84 per cent of GDP). Household and corporate debt are both at a similar percentage of GDP, and financial sector debt is nearly 200 per cent (www.ons.gov.uk/peoplepopulationandcommunity/­ personalandhouseholdfinances/debt/articles/householddebtinequalities/ 2016-04-04). None of this could be paid off without economic growth or unprecedented levels of deflation. When UK debt stood at 200 per cent after World War II, it took over five decades to repay loans to the USA, and this was only possible because of a historically high compounded growth rate of 2.6 per cent. It is hard to see how these kinds of growth rates can be achieved in advanced economies in future (Gordon, 2016). In highlighting the difficulties of tackling climate change through the putting in place of fundamentally different economic systems, we are not trying to defend the status quo. However, we are making the serious point that the economic, business and political status quo cannot be discounted as a force that has to be taken into consideration when tackling climate change. The same is true when it comes to looking at individual industries. For example, there is a strong ideological and indeed scientific case to outlaw fossil fuels as a source of energy and as a raw material. But how would this be achieved without causing a level of disruption that would jeopardise the political and economic feasibility of tackling climate change? Even if there were sufficient renewable and nuclear energy available—something that is unlikely to happen until the last half of this century at the earliest (Nelson et al, 2014)—it would not fully replace fossil fuels. In part, this is because fossil fuels are still widely used in chemical-reliant industries such as agriculture and plastics. However, it is also because renewable energy is not yet a direct substitute for fossil fuels in all situations. For instance, making a YouTube video—the kind of technology associated with climate friendly social innovation—involves about 60 different minerals according to the International Council on Mining and Minerals. Yet none of these can as yet be extracted at scale without the use of fossil fuels because renewable energy is often the ‘wrong sort’ of energy for mining. Moreover, some of these minerals which currently depend on the use of oil and gas are essential to create a low carbon economy (eg lead, lithium, nickel and

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sodium technologies for batteries; zinc, aluminium, magnesium and platinum for hydrogen fuel cells). Fear that support of fossil fuels as part of a climate changed economy will be met with a backlash, not least from those who think business is a main cause of the climate change problem, means that it can be difficult for business to develop coherent policies. It can also mean that investors are reluctant to put money into important but seemingly perverse technologies such as carbon capture and storage for fear that they will be criticised for being supporters of fossil fuels (Richter, 2014).

D.  Type 4: New Business The final examples of business responding to climate change are ones where parts of a company or entirely new companies have emerged as a response to climate change challenges. Within companies such as Renault and Caterpillar, remanufacturing has been introduced to enable the same materials to be used multiple times in line with the principles of a ‘circular economy’, ie a development cycle that preserves and enhances natural capital, optimises resource yields, and minimises system risks by managing finite stocks and renewable flows. The circular economy is also at the heart of new companies such as Cirkle, a Belgian food processing and food waste firm, and Riversimple, the UK car producer. It builds on principles already familiar to companies that have embraced cradle-to-cradle manufacturing (eg Herman Miller) and the Natural Step (eg Interface). Similar principles have also been adopted within companies such as Nike and Philips. Common to all such initiatives is that products are designed to reduce material usage, to increase the opportunities for reuse, and to enable the management of the product’s postproduction life. There are other technological innovations that enable new types of business to emerge. Additive manufacturing, for instance, promises less waste compared to traditional lathes and mills, but is also well-suited to local production of products designed almost anywhere in the world with adequate internet connectivity. The empowering use of information technology is something that Mason (2015) highlights as a feature of what he calls ‘postcapitalism.’ He points to three features of a new economic system: collaborative production divorced from traditional business structures and ownership models; the replacement of markets built on resource scarcity with a system that creates value from the abundance of information readily available to almost anyone; and the changing nature of work, particularly because of automation. Postcapitalism is a theory, glimmers of which can be seen in the current economy. There are examples under the broad umbrella of social entrepreneurship that show how new business is being created within the parameters of the existing e­ conomic system (eg ITC’s e-Choupal initiative for famers in India; KickStart

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which is developing locally made tools for farmers in Kenya). Companies such as Selco and M-Kopa, providers of off-grid solar energy in India and Kenya respectively, have developed new business models the specifically meet the needs of rural communities, and the poor and marginalised (Jack and Suri, 2011). A feature of these initiatives is that they link technological and financial innovation, something that Perez (2002) says is a characteristic of any major transformation in the capitalist era. What is less obvious is any governance innovation. Social enterprises are typically small, privately owned businesses, and typically do not offer the opportunities for joint ownership and long-term benefit that have long been a feature of cooperatives (Nicholls and Teasdale, 2017). Furthermore, as others in this volume explain, a coherent distinct legal framework for alternative business models is still not fully developed.1 This is a significant work-in-progress at the present time because it means that a value proposition framed in terms of climate change impact is always subservient to conventional laws on ownership, accountability, labour and other aspects of corporate governance.

III.  Assessing the Current Situation It is clear from the admittedly cursory overview of the four types of approach characterising how business thinks about climate change, and the examples of what individual companies are doing, that there are limitations and problems relating to what is happening at the present time. The current responses are, in short, inadequate. The four types refer to the positive, climate change aware approaches business is adopting. To them could be added a fifth type which would include the many companies that do not treat climate change as either a risk or an opportunity, including high profile business owners such as the Koch brothers who are prominent climate change deniers and who would see actions to combat climate change as an unwarranted risk to business growth. However, although it is true that on climate change like most other issues, many executives and boards are best characterised as ‘fellow travellers’ rather than leaders, watching what happens and not wanting to be seen as out of step with their peers, it would be inaccurate to portray the majority of companies as hostile to efforts to address climate change. Corporate opposition to China’s commitment to renewable energy in the 2016–20 energy plan has been muted outside of the coal industry (Ward, 2017). Faced with US president Donald Trump’s climate change scepticism, a large number of corporations have lobbied for him not to abandon the Paris Agreement (Tabuchi, 2016). Moreover, surveys of CEO attitudes since the mid-2000s have consistently highlighted the importance of climate change as a recognised business issue (Accenture/UN Global Compact, 2013).

1 

See for instance Boeger et al, ch 18 and Hunter, ch 13 in this volume.

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None of this should be mistaken for signs of significant progress. PWC’s low carbon economy index has shown over several years that carbon emissions have fallen by 1.8 per cent annually in recent years, but need to fall at 6.5 per cent to avoid a 2oC or more temperature increase (PWC, 2016). Encouragingly, emissions fell by a record 2.8 per cent in 2016, but that was the first time since 2000 that reductions have happened at a pace sufficient to avoid catastrophic climate change. Underachievement in terms of emissions reductions so far in the twentyfirst century demonstrates the weaknesses of the current dominant framing of climate change as an energy problem or one that can be resolved through economic policies. It would be an overstatement to say that inadequate responses to the climate change challenge are a damning indictment of neoclassical economic theory and the way they have exerted undue influence over government policy in most of the world’s major economies since the 1980s. However, referring to theories of power, agency and legitimisation by the likes of Lukes (1974), MacLean (2000) and Foucault (Foucault and Faubion, 2000), they can be revealed as part of a public and private policy environment that has legitimised and delegitimised certain policies and ways of thinking. This in turn helps explain why the businessclimate change debate has often been reduced to one about energy and economics. There is not space to explore that theme in this chapter, although it is one of considerable importance for understanding how business’ transformation to an era of climate change will unfold. For the purposes of this chapter, though, it is sufficient to acknowledge that a) reducing emissions to the extent required to carry on with a capitalist growth-based model of prosperity is a huge challenge and one that is not being met, despite nearly two decades of climate change’s being high on international governance agendas; b) business responses are sometimes innovative and show a degree of climate change awareness, but are flawed and inadequate to prevent warming of less than 2oC; and c) economic theory and energy substitution dominate public and private sector policies, even though the lack of progress in reducing emissions at the necessary rate suggest they are insufficient, and that other levers of transformation are required. The above observations further strengthen the argument that business will need to undergo radical change as a result of climate change. As noted earlier, these changes will include alternative management practices and finance, but also relate to the purpose of business, the meaning of value and the role business plays in society. The nature of these changes is complicated by two other factors. First, the changes will be different depending on whether the collective aim is to avoid a 2oC rise in global average temperatures, or whether we are thinking about what business will look like if temperatures rise beyond those levels, creating the conditions for catastrophic climate change. Insofar as there is an overarching narrative about business and climate change today, it is one that assumes catastrophic change can be avoided. We are therefore thinking about radical changes that have to take place in the space of a few decades—less than four by some IPCC calculations; no more than six by the most optimistic ones. This is not unimaginable: the rise of the ­production line or global supply chains took place within a decade.

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However, climate change is not simply a business problem: it is a society-wide problem that requires business to be part of any solution. This in turn means that what is asked of business may not just be technological innovation, but more fundamental things relating to profit, value, ownership, employment, production/consumption and natural resources. These types of shift take time, but they are also ones that business will find difficult to take on in isolation, either from other companies or from government and civil society. They will almost certainly require changes in the legal framework companies operate within, and it is fair to say that as yet the only developments in this area have been emissions legislation for selected industries (eg power generation) and examples of voluntary governance such as the aforementioned Carbon Disclosure Project. Such initiatives are inevitably trans- or international, reflecting the nature of the regulatory challenges themselves. A national regulatory response on climate change, for instance, would—if enacted unilaterally—be doomed to failure because the issue at hand is the management of the global commons. However, voluntary, worldwide initiatives in the private sector are inevitably open to criticism of corporate capture, and that they have the potential to undermine formal international governance as implemented, for example, through the United Nations. Furthermore, the efforts to avoid catastrophic climate change may be irrelevant if the more likely outcome is a rise in temperatures beyond 2oC. There is an understandable reluctance for politicians, business and even climate change activists to countenance this possibility. But if the climate change modellers who think we are within a few decades of catastrophic change are right, then investors, manufacturers, banks, insurance firms and property owners are amongst those parts of the private sector who need to think about what to some people is the unthinkable. The second factor that complicates business in an era of climate change is the distinction between business as a shaper of climate change, and climate change as a shaper of business. At present, the former way of thinking is the most common. The typical question goes along the lines of ‘What can business do to prevent climate change or reduce its negative consequences?’ However, the effectiveness, appropriateness and lasting impact of business’ actions will depend greatly on what the consequences of climate change are. For instance, sea level rises, urban migration to escape denuded agricultural lands, and aquifer depletion are some of the ways climate change will affect not only society but also what constitutes a sensible business decision. At present, discussion of this aspect to climate change is limited to thinking along the lines of how to replace petrol cars with electric ones, and where to site factories so that they are resilient to climate change impacts. Referring to a point made earlier, they are examples of modified business as usual thinking, and do not recognise that business as usual may not be possible.

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IV. Conclusions Climate change now represents a transformation challenge for business. Because of the shortcomings of actions to date, we are at a stage where the idea of adapting to climate change while continuing with a modified business as usual model is untenable. Transformation is an irreversible shift from a known state to one that is fundamentally different, and what constitutes a successful business in a climate changed era is something fundamentally different to what business success looked like in the past. This observation applies equally whether one is thinking about avoiding a rise in temperatures of 2oC, or operating in an environment of extreme climate change uncertainty associated with temperature rise of more than 2oC. However, there is little or no sign that this transformation is being taken seriously. The societal change dimension to climate change is feeble in terms of either scope or impact. Business itself has not ignored the climate change challenge, but its actions so far are insufficient to make a meaningful contribution to the seven per cent annual emissions reductions that are being demanded. Moreover, the other institutions that shape business’ actions are not providing an environment that supports purposeful change. This is true of public policy, legislation, investor decisions, financial risk regulations and consumer behaviour. If this situation goes unaddressed, there are little grounds for optimism that business in anything resembling its current forms will prosper in an era of climate change. However, what exists today is an enormous opportunity to bring about a meaningful and lasting transformation that will benefit business and have a significant positive impact on the climate change process itself. Exploring how that opportunity might unfold is beyond the ambition of this chapter, although as touched on in various sections above it would require a rethinking of value and how that is measured, new management tools and competencies, new governance and ownership structures, and ultimately a new contract between business and the rest of society.2

References Atkinson, AB and Morelli, S (2011) ‘Economic Crises and Inequality’ 6 Human Development Research Paper. Beinhocker, E and Hanauer, N (2014) ‘Capitalism Redefined: Resolving the Tension between a Prosperous World and a Moral One’ 21(1) Juncture 12–24.

2  These themes are taken up in Blowfield, ME (forthcoming) Business Beyond 2 Degrees: Business Prosperity in an Era of Climate Change (Oxford, Oxford University Press).

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Blowfield, M and Johnson, L (2013) Turnaround Challenge: Business and the City of the Future (Oxford University Press, Oxford). Bowen, A and Hepburn, C (2014) ‘Green Growth: an Assessment’ 30(3) Oxford Review of Economic Policy 407–22. Bulkeley, H and Newell, P (2015) Governing Climate Change (Abingdon, Routledge). Carney, M (2016) Resolving the Climate Paradox (Bank of England, London). Fankhauser, S, Bowen, A, Calel, R, Dechezleprêtre, A, Grover, D, Rydge, J and Sato, M (2013) ‘Who will Win the Green Race? In Search of Environmental Competitiveness and Innovation’ 23(5) Global Environmental Change 902–13. Foucault, M and Faubion, JD (2000) Power (New York, New Press). IPCC (2013) Climate Change 2013: The Physical Science Basis. Working Group I Contribution to the IPCC 5th Assessment Report—Changes to the Underlying Scientific/Technical Assessment. Jack, W and Suri, T (2011) ‘Mobile Money: the Economics of M-PESA’ NBER Working Paper Series, no 16721, available at: www.nber.org/papers/w16721.pdf. Jackson, T (2009) Prosperity without Growth: Economics for a Finite Planet (London, Earthscan). Klein, N (2014) This Changes Everything: Capitalism vs the Climate (London, Allen Lane). Lukes, S (1974) Power: a Radical View (Basingstoke, Macmillan). MacLean, J (2000) ‘Philosophical Roots of Globalization and Philosohpical Roots to Globalization’ in RD Germain (ed), Globalization and its Critics: Perspectives from Political Economy (Basingstoke, Macmillan Press). Mason, P (2015) PostCapitalism: A Guide to our Future (London, Allen Lane). Nelson, J, Gambhir, A and Ekins-Daukes, N (2014) Solar Power for CO2 Mitigation (London, Imperial College, Grantham Briefing Paper 11). Nicholls, A and Teasdale, S (2017) ‘Neoliberalism by Stealth? Exploring Continuity and Change within the UK Social Enterprise Policy Paradigm’ 45(3) Policy & Politics 323. Perez, C (2002) Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages (Cheltenham, Edward Elgar Publishing). Rai, N, Best, S and Soanes, M (2016) Unlocking Climate Finance for Decentralised Energy Access (London, IIED). Rapier, R (2016) ‘A Record Year for Renewable Energy’ Forbes.com [Online] 3 June 2016, available from: www.forbes.com/sites/rrapier/2016/06/03/a-recordyear-for-renewable-energy/#4a11e6ff2066. REN21 2016, Renewable Global Status Report 2016, REN21, unknown. Richter, B (2014) Beyond Smoke and Mirrors: Climate Change and Energy in the 21st century (Cambridge, Cambridge University Press).

6 Capitalism: Why Companies are Unfit for Social Purpose and How they Might be Reformed* LORRAINE TALBOT

I. Introduction Capitalism cannot deliver equality and human flourishing because capitalism is the operation of an unequal and exploitative relationship between capital and labour. Companies are unfit for social purpose because they amplify this. They make the perpetuation of inequality a valued governance goal. A well-governed company enhances share value (regardless of negative impacts on society) and rewards executives for achieving that goal. Capitalism allows capital owners to claim uncompensated labour power, but the company amplifies this unequal arrangement by enabling this claim to become a fungible and transferable property form. This allows capital to extract values from companies within national economies and from companies operating globally. State policies designed to re-embed social needs into the market economy through such things as welfare provision, can (and have) modified the exploitative nature of the relationship between labour and capital. Different states have variously enabled organised labour or have enhanced individual labour rights to rebalance the power between capital and labour. However, these policies have been undermined by the growth of global corporate capital which has enabled regulatory arbitrage, a ‘race to the bottom’ in which corporations can access global low paid unprotected labour to replace protected domestic labour. In part, c­ apital’s access to cheap labour lies behind the drive to reduce the rights of organised labour. Indeed, notwithstanding some variation in labour and shareholders’ rights in different countries, the last 35 years of neoliberalism has seen an ongoing shift toward elevating the rights of capital at the expense of labour (Piketty, 2014; Talbot, 2013).  Yet current events indicate that this pendulum swing to capital is finally ­provoking a reaction against the dominant, middle ground political order. In the * 

Research part of a project funded by the Leverhulme Trust.

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UK, left wing veteran Jeremy Corbyn was voted leader of the Labour Party, twice, and with a huge majority, against massive opposition from the established Labour elite. In the US, socialist and anti-corporation activist Bernie Sanders garnered huge and committed support as a Democratic Party presidential nominee. Ultimately, he lost to Clinton the establishment figure, but she went on to be rejected in the presidential elections in favour of the ‘anti-establishment’ corporate billionaire and reality television celebrity Trump. This surprise result mirrored the equally surprising UK’s referendum vote to leave the European Union. Increasingly, the voting public are rejecting status-quo middle-ground politics and opting for parties which are identifiably left or right wing. Furthermore, the trend toward free trade policies, the cornerstone of neoliberal policies, is falling away as the Trans-Pacific Partnership (TPP) seems unlikely to be ratified by the US and the Transatlantic Trade and Investment Partnership (TTIP) is unlikely to be agreed by anyone. The trend now is toward nationally protectionist economies and unbridled criticism of globalisation and the global corporation. For the right this is largely rhetoric, as Trump’s ‘billionaire cabinet’ testifies (Neate, 2016). Trump claims he wants to bring manufacturing jobs back to America and away from the global workforce which US corporations have accessed, but to do so would seriously impact on the American wealth he champions, primarily because of labour costs. The global workforce is paid a fraction of the wages earned by America’s lowest paid workers. Figures from the Bureau of Labour Statistics show that in 2009 Chinese workers’ average hourly wage was $1.74 while in the United States average manufacturing hourly compensation costs in 2012 were $35.67.1 And although labour in the United States is more productive than in comparable Chinese industries, the rate of exploitation is so high in China (and of course, the Global South generally) that this offsets the benefits of investing in more productive and expensive labour from the point of view of profit. Donald Trump will not embrace policies which reduce corporate America’s profitability. Although the political right will not deliver its promises of prosperity to the electorate, its electoral success is indicative of a ‘Polanyian’ reaction against the dis-embedding effect of a free market that has sought to increase profitability by shedding labour protection and welfare provision. The corporate form has further enabled dis-embedding through its global fluidity and ability to access the global, low paid workforce. This has reduced much skilled work in global North countries, particularly in manufacturing and particularly in the US and UK. It has also put pressure on the labour force to accept poorer pay and conditions. The political establishment has allowed corporate interests to dictate the legal and regulatory environment in which they operate to the detriment of labour and labour has reacted. Its support of capital over people has prompted the electorate to disrupt political power, albeit in a way that is often expressed as nationalism and ­harnessed by xenophobes.

1 

The most recent figure for China but unlikely to have changed much by 2012.

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In section II I examine the dominant neoliberal themes of the political establishment’s outlook and its particular effects on labour and capital. In section III I will outline some of the areas in which capital, as represented by corporations, has acted with the political establishment to shape the political, regulatory and business environment. In section IV I set out some reforms which would reduce corporate influence over their own regulation thereby reducing corporate claim to societies’ wealth. I conclude by observing some of the limitations to a corporate law reform agenda.

II.  Neoliberalism, Labour and Corporations: Where the Story Begins Since the 1980s, governments, almost universally, have identified social progress with the success of business. As such, listening and responding to business through varied forums and lobbies is a responsible political activity and an effective way to make regulation. Furthermore, as business success is uncritically viewed as synonymous with profitability (as opposed to, for example, social progress or environmental sustainability) governments have adopted regulations or deregulations intended to maximise profitability. Nurturing a business environment which is attractive to investors only, has been the overarching political strategy of modern governments because capital, and not labour, is identified as the source of growth and wealth.2 The resurrection of this neoclassical notion of government purpose originates from the early neoliberal Thatcher/Reagan administrations in which obstacles to market activities were viewed, according to Hayekian/Austrian theory, as exogenous interferences with market equilibrium (Manne, 1965; Easterbrook and ­Fischel, 1996). The elimination of these obstacles was, however, somewhat selective as neoliberals felt able to tolerate exogenous interferences such as direct and indirect funding to business (Mazzucato, 2013). They focused on reducing the welfare state and removing the power of organised labour because both hampered the free operation of the labour market essential to maximise the wealth which would then ‘trickle-down’ from capital to labour. Logically incoherent (or some would say dishonest) as a plan to enrich all members of society, subsequent and countless studies have shown that a reduction the power of collective labour leads to a direct and corresponding reduction in pay and work security (Freeman, 2005). A free labour market does not (unsurprisingly) lead to an

2  Indeed, leading global institutions such as the IMF and World Bank view investment (capital) as the source of growth, value creation and the solution to poverty while people are viewed as problems to be solved by capital.

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increase in pay and work security but does lead to increased inequalities in wealth and income. Furthermore, there is little evidence to suggest that reduced labour rights even increase economic efficiency per se (ibid). From the late 1990s with the election of a reformed Labour Party, known as new Labour, a decade of ‘third way’ neoliberalism in UK politics preceded the global financial crisis. The third way entailed a continued commitment to the market (with some enhancements such as lower corporate tax) but with the additional twist of increased spending on public goods (Giddens, 1998). Third way neoliberals believed that a ‘free’ market would increase prosperity but that more of that prosperity could be harvested for social welfare. The labour market would continue to be flexible but low wages would be supplemented by tax credits and a minimum wage. This, in theory, would reduce the inequalities which accompanied ‘purer’ form neoliberalism and make the economy better able to meet social purposes. However, despite ‘third way-ers’ increased spending on public welfare, inequality and the rise of the super wealthy persisted. How could this be? The answer is that the market cannot alleviate inequality because the market is the source of inequality. Central to the operation of a capitalist market economy is the commodification of labour power and its exchange with capital. In this exchange, labour power is not fully compensated and the uncompensated part is captured by capital (Marx, 1954). So, where capital enjoys high returns on its investment it is because it has successfully exploited labour. Market success is based on the prosperity of capital, not the prosperity of labour. The company is the central organisational form for mature capitalism. It is central to both neoliberal and third way neoliberal economic strategies. The company encompasses the same exploitative relationship between labour and capital as non-corporate capitalism except that the surplus from unpaid labour power is claimed by the company and ultimately returns to equity capital and to borrowed capital. Additionally, the corporate form also allows capital to be fungible and transferrable, both as shares and as securities. Corporate capitalism encompasses a market in labour interacting with a market in capital, where capital has almost unimpeded freedom of movement. If there is no exogenous hindrance to this arrangement, such as protective labour laws, labour is fully exploitable. Since Thatcherite neoliberalism, the UK has sought to reduce labour protection to the politically acceptable minimum. The political establishment deliberately reduced the unionised manufacturing and mining sector while simultaneously building up the financial sector. This allowed British capital to profit from its global financial operations by skimming financial rents from the values extracted in the global economy (Norfield, 2016). This reduced much of the British workforce to low skill, ‘flexible’ labour with no effective union protection. Additionally, many British businesses have relied on even cheaper and less protected labour than the national workforce by utilising labour from the EU (BBC News, 2013). Temporary labour (‘posted workers’) are employees subject to the labour laws of the ‘sending’ employers from an EU country. Frequently employers will ‘game’ the system by setting up companies from which employees are said to have been sent,

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in countries with low labour protections (European Parliament, 2016). Posted workers, therefore, can exist as the bottom strata of labour with low level labour rights (Clark, 2013). To be sure, supplied labour is supposed to be protected by the Posting of Workers Directive. However, the UK did not pass legislation to implement the Directive. Instead the Labour government passed amendments to the Employment Rights Act 1996 so that it could apply to posted workers and thereby facilitate the implementation of the Directive. This applied a raft of legislation to posted workers but it excluded collective industrial agreements. Posted workers had a right to be paid the statutory minimum wage but not an industry agreed wage, thus they frequently undercut domestic workers (Novitz, 2013). Furthermore, as Deakin argues, such protections as there are for posted workers are largely ignored: ‘there is an air of unreality about the subtle distinctions drawn in the posting jurisprudence, and a gulf separating what the law says should happen, and what is happening in practice’ (Deakin, 2016). He argues that this has enabled extreme labour abuse where the labour ‘supply chain morphs into labour ­trafficking’ (ibid). Part of the problem many labour lawyers and trade unions have identified is that it is difficult for posted workers to know and enforce their rights in the UK, in part because there is no identifiable legislation implementing the Directive and also because enforcement of their legal rights relies on private actions (Novitz, 2013). At worst this results in a vulnerable workforce, unaware of their rights and easily exploitable.3 The UK economy’s reliance on cheap, flexible labour4 has prompted speculation about whether it will survive a Brexit without free movement of EU labour. From farming (Bradshaw, 2016) to Sports Direct (BEIS Select Committee, 2016) to Amazon distribution centres (Bowden, 2016), the UK economy is dependent on cheap labour. It is not, of course, alone. Access to cheap EU labour had also underpinned German industry as the biggest EU user of posted workers where over half of posted workers were located.5 There, cheap EU labour, mainly from Poland, has undermined the bargaining power of local labour and enabled the German government to pass the Katz Reforms severely restricting benefits previously due to German workers.6 Posted workers in EU make up less than one per cent of EU workers, but nonetheless their numbers are rapidly increasingly, up from 1.3 million in 2010 to 1.9 million in 2014.7 Furthermore these figures are likely to be just the tip of the iceberg as the nature of the use of posted workers means that many go unreported.

3  The growing scandal around abused EU workers has recently prompted the European Commission to announce its intention to improve the rights of posted workers in a reformed Directive http:// europa.eu/rapid/press-release_MEMO-16-467_en.htm. 4 www.theguardian.com/uk-news/2013/aug/11/labour-ciriticse-tesco-next-cheap-labour. 5 www.europarl.europa.eu/RegData/etudes/STUD/2016/579001/IPOL_STU(2016)579001_EN.pdf 2016. 6  www.imf.org/external/pubs/ft/wp/2015/wp15162.pdf especially 8–11. 7 http://europa.eu/rapid/press-release_MEMO-16-467_en.htm.

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As these few examples show, what is good for business is bad for labour and, as most of the world’s population fall into the latter category, inequalities abound. Addressing social problems like inequality requires challenging the market itself. But so integrated are governments to national and global capitalism and so unshakable is their political belief in the market’s ability to deliver wealth, that far from controlling big market actors like corporations, government bodies have long integrated them into the making of regulation and in the mechanisms to regulate corporate activities. In the following section on shaping the corporate environment, I touch on five instances of this: corporate lobbying; corporate rulemaking; corporate control of regulators; corporate ability to choose less regulated legal structures; and corporate social responsibility.

III.  Shaping the Corporate Environment A.  Corporate Lobbying Collusion in the making of regulation is most readily seen in the corporate lobbying business (Cave and Rowell, 2014; Jones, 2014). Lobbying, of course, is not the sole province of corporations and many groups, including trade unions and civil society groups, represent different interests, from labour standards to environmental protection. From the policy maker’s perspective, it may be wise to consult all relevant ‘stakeholders’. But such consultations are skewed, and known to be skewed, to the larger and more powerful corporate lobbyists who dominate the lobbying of national governments and the multi-state forums in which law and regulations are made. In Brussels, the geographical and political centre of EU law making, lobbyists representing corporations are more numerous (around 70 per cent of all lobbying personnel), better funded (corporations fund partisan scientific studies) and are better connected than other lobbyists.8 In their Brussel’s offices, thousands of lobbyists and numerous private consultants and law firms are employed to lobby on behalf of the corporations. Lobbyists are also enticed from EU agencies, creating what anti-lobbying activists such as ALTER-EU and Corporate Europe Observatory call the ‘revolving door problem’. EU officials are head-hunted and then employed by lobbyists for their contacts and insider knowledge and may even later leave the lobbyists and return to public office (Brussels: EU Quarter). ALTER-EU claims that over half of the lobbyists at four well-known Brussels lobby consultancies ‘have previous experience inside the EU institutions’ (ibid). To be sure, the connection between corporations and EU law-making is not entirely hidden. The European Parliament set up its transparency register for 8 https://corporateeurope.org/sites/default/files/publications/ceolobbylow.pdf.

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lobbyists in 1995 while the Commission set up its register in 2008. The two institutions merged their instruments in a joint European Transparency Register in 2011. This register holds records of who lobbyists are, how much they spend, how many people work for them and what issues they are hoping to influence. The declarations are, however, voluntary. Consequently, activists claim that the register is ineffective and that the many thousands of entries are grossly incomplete. For example, Facebook claims that it employs only two people to lobby in Brussels and Apple’s disclosure shows just 250,000 euros spent on lobbying in Brussels—claims which ALTER-EU argues are patently incomplete and misleading. Furthermore, the register seems to cover only about 60–70 per cent of lobbying organisations.9 Because of the shortcomings of the voluntary register, the European parliament has been calling for a mandatory register since 200810 and in September 2016, the Commission put forward its proposals for a mandatory Transparency Register for all three EU institutions—Commission, Council (hitherto not subject to any register) and Parliament. Under this proposal, any lobbyist or interest representative meeting with decision-makers from any of the three institutions would be required to sign the Register in advance of the meeting and as a condition of the meeting. The Commission also proposes to impose sanctions on lobbyists who do not fully comply with these transparency requirements.11 However, in terms of curtailing corporate lobbying, a mandatory register of interests is no magic wand. In Washington, there are nearly 13,000 lobbyists listed on the congressional register who disclose the nature of their interests, but this appears to create little impediment to getting the regulation they want. Collective lobbying by the finance industry successfully removed New Deal laws such as Glass-Steagall Act. In 2014 alone, Pharmaceutical corporations spent $228 million (George, 2015) to persuade the government to extend intellectual property rights in the United States and to pressure other governments to extend intellectual property rights in their favour (Oxfam, 2015). Expert groups, Research Centres, Institutes and think tanks also play an important role in US lobbying—some even providing pre-formulated legislative proposals (American Legislative Exchange Council, 2016). As George notes, corporate funded Centres and Institutes provide the ‘evidence’ (or ‘post truth’ as we might now say) which corporate lobbyists can use to get the regulations they want (George, 2015: 50). Furthermore, the increasingly concentrated nature of corporate capitalism has enhanced the effectiveness of their lobbyists. Oxfam’s 2016 Report notes that through mergers the 10 largest beer producers now own 70 per cent of the global market (Oxfam, 2016). It argues that the size of the largest of these, the Belgium company AB InBev, together with FIFA, enabled them

9 www.europarl.europa.eu/thinktank/en/document.html?reference=EPRS_BRI(2014)542170.

10 ibid.

11  www.parliament.uk/documents/commons-committees/european-scrutiny/Brussels%20 Bulletin/518-7-October-2016.pdf.

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to put pressure on the Brazilian government to change its law banning alcohol ­consumption at football matches in the 2014 world cup (ibid).

B.  Corporate Rule-shaping Governments of the Global North have sought to meet corporate concern to have the necessary regulations and deregulations enabling global free trade. This was to have been delivered by the World Trade Organization (WTO). However, the WTO has largely failed to get agreement on the terms of global free trade particularly in key areas of corporate trade such as intellectual property rights and government procurements. Given the level of consent required from its 160 signatory countries, few resolutions have been passed. As a result, states have pursued alternative strategies to secure free trade for their corporations through bilateral free trade agreements including over 3000 bilateral investment treaties (BITs). These latter treaties have helped shape the global economy ever more to the interests of large corporations and ever more against the interests of host countries’ communities in the Global South. Key provisions in BITs have frequently resulted in governments losing the ability to act in the interest of its citizens if to do so would reduce the expected returns of investors from countries with whom they have an investment treaty. A country’s compliance to these treaties is secured by the now infamous ‘Investor to State Dispute Settlement’ (ISDS) clauses inserted into an individual treaty. They enable corporations to directly sue a country through a private arbitration system if it adopts policies which might reduce their corporate ­profitability.12 ISDS clauses were inserted into most BITs, though many countries saw these clauses as standard small print. Their latent power became apparent in the late 1990s and since then these ISDS have proven very profitable for corporations. Over 400 disputes have been decided and nearly 300 are outstanding.13 Past settlements have included large payments to corporations as compensation for a state introducing such policies as price caps on water or the minimum wage (Balanya et al, 2007). The system has been variously shown to be biased to corporations given the vague rules—‘discriminatory treatment or direct or indirect expropriation’,14 the usual wording in dispute clauses—which have been interpreted very widely. As only investors can initiate proceedings, the l­ucrative

12 This mechanism for resolving disputes was approved by the World Bank in 1964 through the ICSID Convention 1966. Before ICSID, investors seeking remedies were obliged to lobby their ­governments into negotiating with the ‘offender state’ on their behalf. 13  As the UNCTAD statistics show, many disputes have been decided in favour of the country. ­However, corporations tend to pursue action regardless of merit or probability of success and many of those fall under the other big category of ‘settled’ cases (24.5 per cent) in which some compromise agreement would have been reached. http://investmentpolicyhub.unctad.org/ISDS. 14  www.nortonrosefulbright.com/knowledge/publications/30459/expropriation-investmentprotection-and-mitigating-the-risks.

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a­rbitration b ­ usiness these clauses have spawned is dependent on keeping the corporate client happy and encouraging more business. However, the grand plan of many states’ ‘rule making with corporations’ has been the creation of long term free trade between multiple countries through a single international trade and investment treaty. A key forum for the delivery of global free trade was The Transatlantic Business Dialogue,15 an organisation composed of representatives of leading corporations set up over 20 years ago to advise US and European governments on how to direct policy in respect of trade and trade related matters. Their largest project is TTIP, a proposed treaty between the EU and the US to create a barrier-free world for corporate trade.16 One of TTIP’s most controversial aims was the proposal to use ISDS that have been so beneficial to corporations. However, the plan for global free trade treaties has been so long in the making, that political events have overtaken it. France, for example, has signalled its rejection of TTIP following the documents leaked by Greenpeace.17 More importantly a global free trade treaty is contrary to the populist movements sweeping Europe. Also the TPP free trade and investment treaty agreed in February 2016 between Australia, Brunei, Canada, Chile, Japan, ­Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam and the United States looks set to fall. Donald Trump campaigned on rejecting TTP and is unlikely to ratify it into national law (Woolf, 2016). What is interesting about TPP and TTIP is that the interests of the signatory countries, particularly developing countries, are largely sacrificed to corporations. An impact assessment undertaken by PriceWaterhouseCooper on TTP indicated that there would be no net increase in value for Malaysia and a substantial risk of falling foul of the treaty’s ISDS clauses.18 Similarly, a study from the LSE concluded that TTIP would not generate more investment in the EU and would expose the UK to more risk from corporate litigation (Skovgaard et al, 2013). However, the political elites’ neoliberal or third way neoliberal association of corporate benefits with benefits to the country as a whole, leads them to engage in trade and investment treaties which hamstring government ability to protect its citizens or to put citizens’ interests at the heart of policy-making. This obvious oversight in political thinking has prompted massive protests, particularly against TTIP, and the overturn of long standing political order.19

15  Now the Trans-Atlantic Business Council, formed from a merger between TransAtlantic Business Dialogue and European-American Business Council. 16 http://ec.europa.eu/trade/policy/in-focus/ttip/index_e. 17 www.greenpeace.org/eu-unit/en/News/2016/Leaked-TTIP-documents-released/. 18  At the same time the government commissioned a report on the political impact of TTP, which concluded that it could work as a bulwark against China. Many argue that Malaysia chose the political predictions over the economic. Account from Wong Chen https://en.wikipedia.org/wiki/Wong_Chen. 19  Albeit in favour of a new order that intends to stick with most of the current norms of capitalism, including further attacks on labour protection and the reduction of welfare provisions www.nytimes. com/2016/12/08/us/politics/andrew-puzder-labor-secretary-trump.html?_r=0 note also Trump’s choices for Supreme Court and Attorney General.

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C.  Corporations and their Regulators Corporations are heavily integrated with agencies that also act as their quasi regulators or have some regulatory role. Auditors are particularly integrated and susceptible to corporate demands. At an international level, the creation and oversight of international accounting standards is essentially undertaken by top accountancy firms and corporations. The main work of creating international standards falls to two companies, the International Accounting Standard Board (IASB) and the IFRS Interpretation Committee. Both are subsidiaries of the IFRS Foundation, a not-for-profit corporation incorporated in Delaware. The Foundation oversees the work of the IASB and is monitored in this by the Trustee ­Committee. The IASB creates International Financial Reporting Standards, which include ‘pronouncements’ by the IASB and interpretations of those pronouncements by the IFRS Interpretation Committee. This also includes predecessor standards, pronouncements and interpretations from the International Accounting Standards, the International Accountants Standards Committee and Standing Interpretations Committee (SIC) respectively. The IASB and the Interpretation Committee have various advisory committees. Both the IASB’s and Interpretation Committee’s membership are drawn from global accountancy firms (whose main business is as accountants and auditors to the biggest global corporations), corporations and regulators who have worked alongside business and global corporations. In the IASB committee of 12 members, four have a purely regulatory professional background (Hans Hoogervorst, Sue Lloyd, Chunghoo Suh, Wei-Guo Zhang). One, a regulator for some years with the Central bank of Brazil, was previously an auditor with a large international accounting firm (Amaro Luiz de Oliveira Gomes). Other members are drawn from corporations and global accountancy firms. This includes the current Managing Director of UBS investment Bank (Stephen Cooper), a former partner with Arthur Anderson & Co, Paris (Philippe Danjou), former Head of Group Reporting at Deutsche Bank AG (Martin Edelmann), former Corporate Vice President of Xerox Corporation (Gary ­ ­Kabureck), former General manager of Sumitomo Corporation (Takatsuga Ochi), former CFO of FirstRand Banking Group (Darrel Scott), and former KPMG’s head of its International Reporting Group (Mary Tokar).20 The Interpretation Committee of 14 is even more ‘represented’ by global corporations and their auditors. It includes Andrew Buchanan, global head of IFRS at BDO, an international network of independent accountancy firms and tax advisory firms.21 Other members are drawn from the UK-based ‘Big Four’ including PriceWaterhouseCooper (Tony de Bell), KPMG (Reinhard Dotzlaw),

20  Information correct as of 13 December 2016, www.iasplus.com/en/resources/ifrsf/iasb-ifrs-ic/ iasb-board. 21  In the UK alone BDO is the sixth largest accountancy firm.

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Ernst & Young (John O’Grady) and Deloitte (Robert Uhl).22 Outside of UK groups, members are drawn from other large corporations and leading ­accountancy groups. To be sure, positions on the IASB and Interpretation Committee require skill, knowledge and experience, which these committee members no doubt possess. However, they belong to a group of professionals who are (at minimum) accustomed and trained to regard issues through the groupthink lens of corporate interest and the promotion of the market. They do not represent, either officially or unofficially, the interests of workers or citizens, yet they preside over the acceptable practice of global capital. In the case of those drawn from global accountancy firms, their activity in these committees will directly affect past, present and (given the revolving door between business and regulators) future corporate clients. Maintaining a regime that is acceptable to corporations and maintains the regulatory status quo, is in everyone’s interest. The relationship between the regulated and the regulator here is so blurred it recalls Orwell’s Animal Farm where the animals looked at the men and then to the pigs standing on their hind legs and could see no difference between the two. At a national level, large accountancy firms work hand in glove with shareholders and directors to enable their extraction of values from companies. Philip Green created a complex corporate network around BHS and Arcadia from which he (legally) enjoyed large dividends, far in excess of recorded profitability (Talbot, ‘The Conversation’, 2016). This contributed to the demise of BHS. Little investment was made into a business whose brand was considered so outdated that Green and his associates were able to buy all the shares and total control of the company for less than half the value of its assets. This bargain was represented in the company accounts as ‘negative goodwill’ of nearly £200,000—later treated as distributable profits for accounting purposes (ibid). Many of BHS’s most valuable real estate properties, their shops, were sold to the Arcadia groups and then leased back for substantial sums. Dividends of £423 million were distributed mainly to Green and family which were funded by loans, the selling of assets, other actions and (in the case of the pension fund) inactions. The adequacy of the directors’ care of the BHS pension fund is yet to be established but we already know it has a £500 million deficit. Arcadia may be in a precarious position. Green and his f­ amily have made a net profit of over £1 billion from Arcadia through a fuzzy reading of dividend law (ibid). Arcadia assets were revalued and transferred to a newly formed 100 per cent owned subsidiary company in exchange for shares in the new company. The extra value was treated as realised and distributed as dividends. As successive BHS Annual reports make clear, none of this could have been achieved without the advice and agreement of the company’s auditors.

22 Information correct as of 13 December 2016, www.iasplus.com/en/resources/ifrsf/iasb-ifrsic/ifrs-ic.

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D. Less Regulated Business Forms: Going Private and Not Enough Corporate Veil Many injustices (in a non-legal sense) have been enabled by the corporate veil, from tax avoidance to regulatory arbitrage to the avoidance of corporate liability in personal injury claims. However, injustices may also be enabled by those who ignore the corporate veil and see no distinction between shareholder property (the share) and company property (the assets). Notwithstanding the courts’ famous aversion to piercing the veil (Salomon v Salomon (1897); Prest v Petrodel Resource Ltd [2013]) there seems to be a willingness to accept that in private companies, directors and shareholders can act as if company assets are in fact their own. Company auditors seem happy to embrace that vision especially in respect of private companies. Thus, it was no surprise that when Philip Green acquired BHS Plc, his first act as director was to re-register the company as private. Going private has long been the mechanism used by private equity after acquiring a public company to gain complete control of the enterprise, free from the legal requirements applicable to public companies. At worst, going private appears to give tacit permission for shareholders (who are also directors) to syphon off values accumulated in public organisations to the detriment of the workforce. When value is lost from the company’s pension fund (as is increasingly the case) the public ultimately pays the shortfall.23 In a public company, there is a distinctive and material separation between shareholder and company property. The law defines the property of share as a title to revenue (Companies Act 2006 section 541) and the tangible productive assets (and debts) as possessed by the company (Salomon v Salomon (1897)). In public companies, directors attend to that separation and while decisions are made to promote the interests of shareholders, the requirement to have regard to the long term preservation of the business forms part of their reporting requirements under the law (Companies Act section 417(5)). This is not to say that public companies are not driven by shareholder maximisation or that the law doesn’t facilitate and require shareholder maximisation. It simply means that directors distinguish between the company and the shareholders but make decisions about how company assets can be utilised to maximise returns for shareholders. In private companies, that distinction, the separate corporate personality of the company, becomes indistinct. The majority shareholders of private companies are usually the directors. And, as directors whose fiduciary duty is to promote the success of the company in the interests of members (that is to say, themselves), there is little legal incentive to act as stewards of the enterprise. There is instead every incentive to essentially disregard the corporate veil and to treat company assets as their own. Of course, the law does not condone straightforward appropriation of company assets, which is certainly actionable (Re Purpoint Ltd [1991]). There are, 23 www.thepensionsregulator.gov.uk/public-service-schemes.aspx.

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however, many other ways in which company assets can be indirectly transferred to shareholders. Selling company assets and then leasing them back reduces company assets so that these values can be distributed to shareholders as dividends. A private company only has to show that realised assets exceed realized losses to declare a dividend (Companies Act 2006 section 883) and meeting the ‘realised’ criteria is not difficult in private companies (Talbot, ‘The Conversation’, 2016).

E. Letting Corporations Choose: Corporate Social Responsibility Belief in the market’s ability to deliver wealth and to self-regulate—either by the invisible hand or the partly visible hand of business working with regulators—also manifests itself in a corresponding belief that the market creates strong incentives for corporations to act in a socially responsible manner. Corporations, it is claimed, are motivated to self-regulate their social and environmental impact because not to do so would damage their reputation and consequently their market value including their credibility with consumers. Who wants to buy from a company that uses child labour? Market induced incentives, it is argued, are so determinative of corporate behaviour that they remove the need for external controls. Indeed, the construction of social responsibility as a good business decision is closely aligned to it being a voluntary decision. Corporations, from this perspective, are therefore best placed to select the most impactful, responsible activities. Corporations have an interest in choosing the nature and extent of their social responsibility rather than have social responsibility imposed by hard law requirements. As the resistance of external interference is intrinsic to corporate social responsibility (CSR), it is unsurprising that it is readily embraced by the largest national corporations and global corporations.24 And, while there are some reports of socially desirable CSR activity, it is more often the case that CSR is used as a pretext for deregulation or to deflect further regulation (Banerjee, 2008). Essentially, CSR displaces the role formerly performed by state and hard law (Villiers, chapter 8 of this volume). Corporations also have an interest in having their socially responsible acts recognised. Visibility can be assisted by embracing a readymade Code that it recognisable by investors, consumers and other relevant market actors. Nearly 75 per cent of global corporations report on their corporate responsibility and most use specific CSR Codes and Guidelines. 78 per cent of CSR reporting refers to the Global Reporting Initiative Guidelines.25

24 www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/corporate-responsibility/ Documents/corporate-responsibility-reporting-survey-2013-exec-summary.pdf; ww.kpmg.com/CN/ en/IssuesAndInsights/ArticlesPublications/Documents/kpmg-survey-of-corporate-responsibilityreporting-2015-O-201511.pdf. 25 www.globalreporting.org/Pages/default.aspx.

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Similar guidelines are concerned with issues of specific social concerns such as human rights or labour rights. These are largely provided by global institutions or private accreditations systems. Again, corporations directly and indirectly exercise enormous influence over the creation, monitoring and enforcement of these Codes.26 The UN’s Ruggie ‘Framework’ (Ruggie, 2008) was praised for its involvement of global corporations in its creation in contrast to the business snubbing UN Norms. The ‘principle based’ human rights initiative Global Compact was agreed between Kofi Annan and major corporations, sponsored by the CEO of Nestle and announced at Davos.27 Global Compact is popular with corporations. They get the credit for signing up and being aligned to UN endorsed human rights commitments, without having to evidence any of their claims, without being monitored by any external body and without committing to any binding obligations. Other initiatives that go further in conforming to basic standards of specificity and engagement have found monitoring and enforcement difficult. Social Accountability 8000 (Social Accountability 8000, 2008), established to reduce sweatshop practice through social auditing, has largely failed. The system of training and funding is faulty. Social auditors first invest in their (not inexpensive) training and then earn from the companies they audit. Without companies choosing to have this audit, there are no customers so audits are unlikely to be so exacting as to put off future clients. These are all problems inherent in private voluntary systems. Both the monitors and the monitored become mutually dependent as their survival is dependent on the other. Social Accountability International itself is a charity dependent on funds, much of which comes from their corporate members.28 Proponents of CSR rightly point to the limited options for protecting workers at the end of global value chains, where the value is appropriated by the ‘rent’ holding chain drivers—usually western based corporations. A developing state may not be able to protect workers’ rights, if, as is often the case for these countries, they have entered into a bilateral investment treaty. Further, governments may be unwilling to protect workers because their politicians are frequently the owners and employers of their country’s businesses and employees. Here labour protection is hampered by ‘straight-forward’ state corruption. It is a huge problem but sadly not one that is solvable through CSR. Even when accompanied by outside monitoring there is collusion, capture or good old fashioned intimidation. CSR shields corporations from clear, enforceable regulation with consequences for non-compliance.

26  Even less effective in changing corporate behaviour are the guidelines corporations establish themselves. The Ethical Trading Initiative is an industry derived code which requires members to submit annual reports to the ETI board showing how they are dealing with labour conditions in their supply chains and how they have complied with ETI base principles. There is no external monitor and no persons or mechanism to ensure these standards are maintained. 27 http://archive.corporateeurope.org/un/icc.html. 28 www.sa-intl.org/index.cfm?fuseaction=Page.ViewPage&pageId=906.

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It keeps the regulation of corporate misbehaviour within the private sphere under the gaze and control of the regulated entities. It is part of the myth of capitalism’s ability to self-adjust to redress social problems. It obfuscates a fact that is increasingly difficult to hide; namely, that the social problems and inequalities created by capitalism, particularly capitalism through the corporate form, are endogenous to capitalism and so by definition not solvable by capitalist business organisations.

IV.  How Can We Make Companies (More) Fit for Social Purpose? I have argued that the company is not fit for social purpose because it exacerbates the exploitative nature of capitalism itself. The argument presented in this chapter has focused on the ways in which companies influence regulation, thereby resisting the embedding of their activities into socially beneficial norms. This ensures that the interests of the wealthy capital owners remain the unencumbered goal of corporate activity. Changing that and embedding the company into socially progressive norms, thereby making the company fit for social purpose, in part depends upon the relationship between political and economic institutions and whether political institutions are truly committed to promoting the social above the economic. More recently we have seen a shift in rhetoric which suggests they would. We are living through a rapidly changing political environment, in which many political institutions and figures are now identifying global and corporate capitalism—oligopolic, faceless (often code for foreign) and elitist—as the problem. Governor of the Bank of England Mark Carney stated that ‘Globalisation is associated with low wages, insecure employment, stateless corporations and striking inequalities.’29 Theresa May called for substantial reform to corporate activities and while the government has now resiled from this (note later section) the very fact of making that call shows that these are changing times which are destabilising the political status quo. This provides radicals and reformers with the opportunity to address corporate abuses. Here are some intermediate reforms we can pursue which would begin to make the company better fit for social purpose.

A.  Corporate Lobbying To resist the corporate lobbying which operates around every law-making organisation, we need coordinated international action to ensure that national registers are both mandatory and require meaningful disclosures. The Commission has 29 www.bbc.co.uk/news/business-38210169.

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now put forward its proposals for a mandatory Transparency Register for all three EU institutions but what is required is not just disclosure, but also consequences because of those disclosures. Sunlight only shows you where the dirt is, it won’t do the cleaning. The sunlight that is shed on lobbyists’ activity needs to have a corresponding effect on policy makers’ activity. They need to shift from the regulatory fashion for embracing business’s views, to a healthy scepticism of business which is driven by an over-riding commitment to the public interest. Evidence from research centres that are funded by corporations with an interest in a certain outcome should be critically examined in the light of other non-partisan evidence. In the same vein, the issue of ‘revolving doors’ needs to be taken seriously. A cooling off period of some years before personnel can move from officialdom to lobbying or vice versa should be the minimum requirement. Measures to ensure without doubt that the information they possessed as an official is no longer valuable to corporate lobbies is a baseline requirement for protecting the public. Reform of the accounting and auditing process is also essential to ensure that companies are not ‘tunnelled’ in the name of shareholder value. Currently the profession has weak incentives to comply with the spirit of regulations, and strong incentives to keep their corporate clients happy. Auditors and accountants tend to see proper representation of their client as synonymous with achieving the outcome desired by directors and shareholders, rather than the company. Accordingly, if directors and shareholders wish to deal with company assets in a particular way then accountants and auditors will find a way this can be achieved. This often involves very strained interpretations of the law in the knowledge that private companies generally avoid public scrutiny and are required to disclose little of their financial transactions. At minimum, there should be a legal requirement for auditors to act in the interests of the company as a whole, including employees and pensioners. Failure to so act should be actionable by a regulator. A stronger approach would be to nationalise the auditing business making it a state/regulatory function to audit, thus definitively ensuring that company accounts comply with regulation. A thorough study should be undertaken of the practice of corporate accounting so that more detailed recommendations may ensure an end to parasitical value extraction by company directors and shareholders.

B.  Re-registering a Public Company as a Private Company The Green paper on Corporate Governance Reform published in November 2016 recognises that large private companies, mainly composed from public companies that have gone private, pose a corporate governance problem because their activities impact on many different stakeholders.30 The paper notes that large private

30 www.gov.uk/government/uploads/system/uploads/attachment_data/file/573438/beis-16-56corporate-governance-reform-green-paper-final.pdf.

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companies are numerous—over 2,500 have over 1,000 employees.31 It also notes that the trend over the last 20 years has been towards private companies, as companies rarely raise capital through public equity markets (indeed more shares are retired than are issued). However, the Green paper posits the governance problem as the non-applicability of the UK Corporate Governance Codes to these private companies and explores ways in which a new more applicable and probably voluntary Code might be applied. This proposition entirely reflects the ‘company as its own regulator’ approach criticised in this chapter. A lack of a single applicable Code (there are already many industry-generated Codes for private companies) is not the governance problem from a social purpose perspective. The problem is that re-registering a public company as a private company enhances shareholders’ ability to legally extract value. A public company that re-registers as a private company creates an entity that encompasses many decades of accumulated value from the workforce but can act as if it were a small entrepreneurial concern in which separate corporate personality is just a technicality to avoid fraud. The new shareholders can then extract years of accumulated corporate assets, in tangible or money assets. Furthermore, the legal change from public to private company does not alter the fact that it remains a large business which may operate with tens of thousands of employees and possess valuable property. However, once registered as a private company, assets can be sold off, workers made redundant and pension funds can fall into deficit. The social consequences of transforming a large public enterprise into a private company are too profound to be simply a matter for (usually new) shareholders. An unassailable case should be made for this change in legal status. If that case is successfully made, the new ‘post-public’ company must be subject to special transitional requirements to protect assets and pensions. Dividend law must be applied strictly so that a transfer of revalued assets to a company within the group cannot legally constitute ‘realised’ profits (Companies Act 2006 section 830). Similarly, paper profits, such as negative goodwill, cannot be treated as distributable profit.

C.  On Corporate Self-regulation for Social Ends If corporate social responsibility (CSR) is to be an effective means to make the company fit for social purpose, it must be less CSR-like, less voluntary. CSR must be a definite set of requirements applicable to all companies of a reasonable size, regardless of whether they are private or public companies. This must include independent monitoring with effective behaviour-changing sanctions for noncompliance. Corporations aren’t likely to agree to this; which is precisely why

31 www.gov.uk/government/uploads/system/uploads/attachment_data/file/573438/beis-16-56corporate-governance-reform-green-paper-final.pdf, 43.

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CSR-type arrangements are most effective when they are not voluntary. After Rana Plaza (The Clean Clothes Campaign), corporations would not have agreed to something as ‘hard law’ as the Bangladesh Accord 201332 if local people, Trade Unions and international activists had not pushed the agenda (Donaghey and ­Reinecke, 2015). They challenged the corporations’ claims that they were simply buyers, contracting at arm’s length. They showed the utter vacuity of the CSR Codes they were already signed up to.33 However, as ground breaking as the Accord is, it only covers factory safety. It does not cover the poor wages, summary dismissals, employer intimidation, violence against trade union activists and many other problems which dog Bangladeshi factory workers.34 Indeed, the everyday exploitation of billions of workers falls outside CSR more generally. Highlighting the everyday exploitation of workers in developing countries (as many NGOs do so expertly) keeps us informed, but in terms of what can be done, CSR has no improving role. That push back against the dis-embedding effect of the market comes from the activity of those who are suffering social dislocation. Only through organised labour can workers claim better pay and conditions. This is precisely why labour unions in the UK and US were routed in the 1980s.

V. Conclusion It is possible to have reforms which would help readjust the balance of power between corporate capital and people as both workers and citizens. Such are these small handful of reforms offered here which aim to re-adjust corporations’ ability to control regulation over their own activities and mechanisms which enable corporate owners to extract value. However, the core problem lies with capitalism itself. Capitalism is the source of inequalities and of anti-social societal decisionmaking. Shareholder value driven capitalism is a form of what I would call ‘sharp focus capitalism’, in which the ‘social’ is stripped away as an unnecessary cost to capital—a political reaction in favour of capital when the post-war ‘golden age’ could no longer deliver for both capital and labour in the global North (Talbot, 2016). Most radicals agree that the exploitation of people and the environment by corporations and through global value chains is driven by shareholder maximisation goals. Curtailing the drivers for this are key to making the company fit for social purposes. I have argued elsewhere that shareholders should not have voting

32  The Accord binds the retail corporation which buys garments from the thousands of producers in Bangladesh to agreements to improve the safety of the working environment and to commit to this for a fixed period of years. 33  Primark, for example, was signed up to the ETI. 34 http://laborrights.org/sites/default/files/publications/Our%20Voices,%20Our%20Safety%20 Online_1.pdf.

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rights in the company because these control rights contribute to companies’ drive to profit maximisation and other anti-social activities (Talbot, 2013). Crucially, to make the company fit for social purpose, we need to think about how to socialise claims to the company. In companies with a medium to long life, invested capital has long since been repaid although those companies remain in thrall to shareholder value. Corporate property represents embedded value captured from labour accumulated over long periods. However, far from recognising labour’s claim, companies’ business goals centre on reducing labour’s claim. The statistics on the labour share of national income alone is testament to this (Deakin et al, 2014). A corporation which is fit for social purpose must reverse the current trend and represent the labour claim. This is not an easy task but the alternative would be to accept the ongoing reduction to our welfare and the increase in wealth by a tiny global elite. Currently, capitalism is in a destructive spiral. Corporations exploit the environment to ruinous degrees. Legal mechanisms ensure shareholders claim value from the productive activity of company employees and from exploited workers in global value chains. Corporations lobby for, and get, favourable regulation. They hire law firms and accountants to extract value, to hide liabilities and to avoid tax. But all this is still not enough to protect capitalist interests. Despite the huge power corporations possess to shape the business environment, capitalism today is characterised by falling commodity prices, low growth and low returns on investments. Global investment in production remains low and ‘many economies have become stuck in a low-growth and low-investment equilibrium, with persistent unemployment, stagnant wages, and non-robust consumption’ (OECD, ­Economic Outlook 97: 229). Stock markets remain buoyant by extraordinary financial machinations. Many companies have borrowed heavily and cheaply to return funds to shareholders, through buybacks and dividends. The OECD notes that in 2014 three quarters of US S&P 500 corporations’ capital expenditures ($565 billion) was used for share repurchases (ibid: 234). Austerity is the theme of all major economies. In other words, capitalism is embracing every available mechanism to enhance profits regardless of the socially dis-embedding outcomes, but still, it is ­moribund.35 This failure, and political elites continuing commitment to propping up corporate capitalism, has fuelled political dissent and the rejection of those political elites. Yet without those socially dis-embedding activities corporations would not profit at all. Profit, therefore, is the main obstacle to creating a corporation that is fit for social purpose. Remove profit as the driver for corporate activity

35  The same OECD Report notes that ‘the rate of return on equity (ie net income as a share of shareholders’ equity) of listed companies has returned to or exceeds pre-crisis levels in the United States but remains below pre-crisis levels in the euro area and Japan, and especially in EMEs’ (235). However, the rosier account of US profitability, although undoubtedly better than elsewhere does not consider losses from the global financial crisis.

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and replace it with innovation and efficient production of useful products, add a progressive political challenge to neoliberal individualism and introduce change in the interests of all people, and all things are possible.

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www.nytimes.com/2016/12/08/us/politics/andrew-puzder-labor-secretarytrump.html?_r=0. www.oecd.org/investment/Economic-Outlook-97-Lifting-investment-forhigher-sustainable-growth.pdf. www.oxfam.org/sites/www.oxfam.org/files/file_attachments/bp210-economyone-percent-tax-havens-180116-en_0.pdf. www.parliament.uk/documents/commons-committees/european-scrutiny/ Brussels%20Bulletin/518-7-October-2016.pdf. www.sa-intl.org/index.cfm?fuseaction=Page.ViewPage&pageId=906. www.theguardian.com/business/2003/mar/04/supermarkets.mbas. www.theguardian.com/uk-news/2013/aug/11/labour-ciriticse-tesconext-cheap-labour. www.thepensionsregulator.gov.uk/public-service-schemes.aspx.

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7 Section 172 of the Companies Act 2006: Desperate Times Call for Soft Law Measures GEORGINA TSAGAS*

I. Introduction The previous duty to act bona fide in the interests of the company has been substituted by section 172 Companies Act (CA) 2006, which imposes on a director the duty to ‘act in a way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole’ and in doing so must have regard to a series of factors listed in the section. The factors are: (a) the likely consequences of any decision in the long term, (b) the interests of the company’s employees, (c) the need to foster the company’s business relationships with suppliers, customers and others, (d) the impact of the company’s operations on the community and the environment, (e) the desirability of the company maintaining a reputation for high standards of business conduct, and (f) the need to act fairly as between members of the company. Section 172 of the Companies Act 2006 has been afforded much attention during Parliamentary discussions on the codification of directors’ duties and has since the enactment of the Companies Act 2006 occupied much space in discussions among scholars who share an academic interest in the shareholder/stakeholder debate, in policy documents on law reforms following a series of corporate failures, as well as in company law lecture notes provided by Law Schools across the UK. More specifically, recourse to section 172 CA 2006 in the aftermath of corporate failures has become a norm in a wide range of policy documents from banking law reform regarding the duties of bank directors (Parliamentary Commission

*  I would like to extend my sincerest thanks to Nina Boeger and Charlotte Villiers, for organising the inspiring conference where this chapter was presented as work in progress, and to the participants for stimulating discussions. Thank you to Beate Sjafjell, Nina Boeger and Charlotte Villiers, and Jeroen Veldman for useful comments received on the draft of this paper.

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on Banking Standards, 2013) to takeover law reform regarding the duties of the target board within a takeover context (Takeover Panel, 2010). A series of recent events have all made evident how imperative it is to deal with good governance across a range of companies, whether private or public, and ex ante, rather than ex post.1 More recently, following the employee pension scheme British Home Stores scandal (Dakers, 2016), the 2016 Green Paper on Corporate Governance Reform sought views on, among others, whether there are measures that could increase connection between boards of directors and other groups with an interest in corporate performance such as employees and small suppliers; and whether some of the features of corporate governance that served companies and society well in relation to listed companies, should be extended to the largest privately held companies at a time in which different types of ownership are common (Green Paper, 2016). In late August 2017, the Government published its response to the Corporate Governance Green Paper (Department for Business, Energy and Industrial Strategy, 2017). Amongst other issues, the Government considered the utility of section 172 CA 2006 within the context of the broader corporate governance reform. Additional proposals were made, which would, in the Government’s estimation, reinforce the utility of the said section with a view to strengthening the employee, customer and wider stakeholder voices (See Section 2 of the document which sets out three key proposals for reform). Among other proposals, the ­Government proposes to introduce secondary legislation to require all companies of significant size, private as well as public, to explain how their directors comply with the requirements of section 172 to have regard to employees and other interests. In light of the above and with the UK leaving the EU, it is a critical time to discuss enlightened decision-making on boards, considering that, arguably, one of the key benefits of joining the EU with regard to UK company law, was that the UK was prompted to consider incorporating provisions affording a certain level of protection to the interests of other constituencies across a wide range of company and securities law Acts and regulations. What often escapes the attention of participants in discussions surrounding section 172 CA 2006, is the section’s limitations, not so much in terms of it prioritising the interests of shareholders over the interests of other constituencies, but with regard to its enforcement and utility overall. The purpose of this chapter is twofold. First, it aims to shed some light on the background and function of section 172 CA 2006. Second, after considering the challenges, shortcomings and dilemmas surrounding the function of this

1  For example: (i) the collapse of British Home Stores (BHS), a privately owned company, and the problems that stem when pensioners of such companies need to be afforded protection by a taxpayerbacked fund, (ii) the collapse of banks and subsequent bailouts of banks deemed ‘too big to fail’ and (iii) issues that relate to empire building through ill-thought out mergers and acquisitions of companies which eventually collapse, with a grave impact on various constituencies and the societies in which the companies operate.

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section, it suggests ways forward by proposing a change in the mode of regulating this aspect of managerial conduct. Ample evidence suggests that section 172 CA 2006 in its hard law form will not facilitate the goal of promoting the ‘good governance’ of companies that have a high impact on society in terms of enlightened decision-making. Thus, the paper aims to advance an important aspect of UK corporate law in the making: namely suggest the use of alternative means available in the soft law sphere, that could support a more pluralistic and democratic formation of corporate decision-making. The present chapter is divided as follows. The second part of the chapter sheds some light on the background and function of section 172 CA 2006 and how the duty has evolved from a duty to act in the interests of the company to the codified duty of section 172 CA 2006. After considering the challenges, s­ hortcomings and dilemmas surrounding the function of this section, the third part of the ­chapter provides a discussion on ways forward by proposing a change in the mode of regulating this aspect of managerial conduct. It proposes that a provision along the lines of section 172 CA 2006 should be introduced into the C ­ orporate Governance Code and provides a useful set of justifications for this proposal, as well as an acknowledgement of the challenges that a proposal as such may be faced with.

II.  The Evolution of the Duty to Act in the Interests of the Company The reform process of the Companies Act 2006 (henceforth CA 2006) aimed to provide clarity and accessibility, align what is good for the company with what is good for society at large and keep legal regulation to the minimum necessary to safeguard stakeholders’ legitimate interests (Law Commission, 1999). Codification was supported by the British business community and by prominent organisations such as the London Stock Exchange (Ferran, 1999). The ‘enlightened shareholder value’ approach adopted in section 172 CA 2006 was seen as the approach ‘most likely to drive long-term company performance and maximise overall competitiveness and wealth and welfare for all’ (DTI, 2005). The Rt Hon Margaret Hodge MP, Secretary of State for Trade and Industry, in her Ministerial Statement on the reforms to the duties of the company directors, commented that the provisions of the Companies Act regulating directors’ duties could either be seen as a mere codification of the existing law or as a radical change; and section 172 CA 2006 in specific would qualify as a change, as the section links what is good for a company to what is good for a society at large (DTI, 2007). Section 172 was considered of value insofar as it prompts a change in d ­ irectors’ mind-set and recommends a change in the way in which boards should proceed with their decision-making as a matter of practice, rather than as a matter of liability. The challenge directors are faced with is an obvious one; how should

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they balance these conflicting interests? It is hard to draw a distinction between the role that the law plays versus the role that economics play in shaping directors’ decision-making processes. The distinction between the duties that directors legally owe to the company and the duties that directors owe on an abstract level to their shareholders through free market and competition pressures is blurred. Winter and Van De Loo contrast the role of law to that of economics in relation to regulating the conduct of the board by explaining that whereas law stays at the margins of what boards are doing by focusing on formalities, process and liability (Winter and Van de Loo, 2014), economists take a view on what boards should be doing, and also on how to control boards to ensure that they do it (ibid). Seen in this light, it is evident that, despite section 172 CA 2006 being a hard law duty as incorporated in the Companies Act 2006, it is in fact a provision with a ‘soft law’ impact on corporate decision-making at best. One could therefore perhaps safely argue that section 172 CA 2006 adopts an approach which is closer to the law and economics rationale (Fama, 1980; Fama and Jensen, 1983; Jensen and ­Meckling, 1976), and is worthless as a hard law provision in its own right. This is why section 172 CA 2006 makes more sense when considered in parallel to sections in Chapter 15 of the Companies Act in relation to corporate reporting. Section 172 CA 2006 appears to represent a compromise between two opposing positions on the purpose of the company. The answer to the question of ‘whose interests should directors promote?’ is intricately linked with the question of ‘what should the purpose of the corporation be’ (see eg Dodd, 1932; Berle, 1932). On the reformulation of the duty ‘to act in the interests of the company’ at common law, an important debate which arose concerned whether to adopt a shareholder primacy model or a pluralist model on the redrafting of the duty. A more pluralist approach to the drafting of the section than currently exists, failed on the grounds that it was difficult to provide a safe enforcement mechanism that is alternative to the safe shareholder control mechanism that was already in place. The duty was reformulated on the basis that the duty should reflect modern business needs and wider expectations of responsible business behaviour (DTI, 2005).

A.  Unaltered Aspects of the Duty The duty at its core has remained unaltered. Section 172 CA 2006, similarly to the old common law duty, continues to impose a subjective test in decision-making, so that the business decision is left to directors, and courts will not interfere in the judgment made (Re Smith & Fawcett Ltd [1942]). The section indeed states that directors must act in the way they think in good faith will promote the success of the company (ibid; Regentcrest plc v Cohen [2001]; Charterbridge Corp Ltd v Lloyds Bank Ltd [1970] and Extrasure Travel Insurance Ltd v Scattergood [2003]). Despite the enactment of the enlightened shareholder value approach in section 172 CA 2006, shareholders’ interests remain the primary focus in ­corporate

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board decision-making, but the interests of other corporate constituencies are taken into account as a variable in the equation that guarantees that the corporate interest is being served. Section 172 CA 2006 had first given rise to concerns about directors being in breach of their duties if they did not consider every interest group individually in their decision-making (Jopson and Eagleshaw, 2006). However, it remains the case that the duty to act in the interests of the company has always, save in special circumstances, been owed to the company and not to individual shareholders or any stakeholders separately (Foss v Harbottle, [1843]). There are cases that refer to the provision of section 172 CA 2006, albeit briefly, stating essentially that the section merely sets out the pre-existing law on the subject. In Re West Coast Capital (LIOS) Ltd (2008), it was provided that section 172 CA 2006 did ‘little more than set out the pre-existing law on the subject’. Re Southern Counties Fresh Foods Ltd (2008) provided that pre- and post-CA 2006 duties ‘come to the same thing’. Also, Warren J in Cobden Investments Ltd v RWM Langport Ltd (2008) stated that the old provision of good faith is ‘reflected’ in section 172 so that the section 172 CA 2006 will most likely be interpreted and evaluated in the same way.

B.  Altered Aspects of the Duty: Ambiguous Terms The statute is different to prior law insofar as it requires the promotion of the success of the company not on its own right as a separate legal person, but for the benefit of the shareholder constituency as a default priority, and explicitly requires that regard be had to other constituencies when considering what promotes shareholders’ interests, so that the standard of care by which appropriate regard is measured has been altered (Kershaw, 2001: 382–84). At common law the duty expressed in the words of directors acting in ‘the interests of the company’ made clear that the duty of the director was owed to the company, mostly in the sense that the company or those acting on behalf of the company could bring a claim against the wrongdoer to enforce the duty. The importance of the reformed duty lies in the fact that it lists a number of factors which directors are prompted to take into account (section 172 (a) (b)(c)(d)(e)(f) Companies Act 2006). Consideration of other factors and stakeholders’ interests do not come second to shareholders’ interests, but rather constitute a means to an end of serving shareholders’ interests, ideally long-term wealth creating and non-value destroying sustainable interests. Although section 172 does not appear to create a fundamental change to the pre-existing duty, it does however introduce the concept of ‘enlightened shareholder value’ (ESV), otherwise understood as a new approach to management decision-making. The impact of the non-exhaustive list of factors in corporate decision-making remains unclear however. When the duty was first introduced, safe practice followed by boards in order to avoid the potential of incurring liability due to a failure to abide by the requirements of the duty, was to

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follow a ‘tick-the-box’ procedure2 and to minute that the matters listed in section 172 CA 2006 had been considered before entering into any major board decision (Marshall and Ramsay, 2012). This practice however began to subside, as it remained the case that courts would consider the belief of the director at the time the decision was taken and not the quality of his business judgement nor the factors taken into account for that matter. The section undoubtedly introduces new terms and concepts, which differ somewhat to the old common law duty. According to the guidance to the ­Companies Act 2006 provided by the Department of Trade and Industry, the term success of the company reflects what the shareholders of the particular company want to collectively achieve, whilst it is accepted that commercial companies will normally equate success with the company’s long-term increase in value (DTI, 2006). Furthermore, it is noted that the company’s constitution and the decisions made under it will ultimately reflect what the ‘success model’ for the particular company is (ibid, columns 255 and 258). What remains unclear, is to what extent the interests of the company and the interests of shareholders overlap. From a political perspective this may have purposefully remained an unsettled matter. As Davies points out in one of his lectures, referring to the interests of the company in an obscure manner may be useful in terms of avoiding political controversy but does not generate transparent law (Davies (2005) at 4). Beyond legal theory and irrespective of whether the company is considered a legal abstract or a natural person, the duty owed to the company should nevertheless in practical terms, be owed to a specific group of persons (Nourse LJ in Brady v Brady [1998] BCLC 20 at 40, CA, who stated that ‘The interests of the company, as an artificial person, cannot be distinguished from the interests of the persons who are interested in it’). At common law the interests of the company are equated with those of its shareholders, specifically current and future ones (Gaiman v National Association for Mental Health [1971] Ch at 330 ‘both present and future members’). Also, according to Brady v Brady, the ‘interests of the company [an artificial person], cannot be distinguished from the interests of the persons who are interested in it’. The term introduced in section 172 CA 2006 ‘the benefit of its members as a whole’, clarifies that this is also the position that the Act adopts. As the Department of Trade and Industry (DTI) document provided: ‘the duty is to promote the success for the benefit of the members as a whole—that is, for the members as a collective body—not only to benefit the majority shareholders, or any particular shareholder or selection of shareholders’.3

2  Despite the note made on the term ‘have regard to’ by Rt Hon Margaret Hodge MP, Commons Report, 17 October 2006, column 789, that: ‘The words “have regard to” mean “think about”; they are absolutely not about just ticking boxes.’ 3 Department of Trade and Industry, Ministerial Statements, Companies Act 2006, Duties of Company Directors (2007) 7–8, quoting Lord Goldsmith, Lords Grand Committee (6 February 2006, col 256) available at www.berr.gov.uk/fi les/fi le40139.pdf.

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C.  Enforcement and Utility Related Issues What remains to be examined is the actual utility of section 172 CA 2006. An assessment of its utility requires an examination of its patterns of enforcement, or lack thereof, an examination of its relationship to other sections of the Companies Act 2006, as well as a discussion of the impact that the duty has had on corporate reporting. There are arguably three spheres in which section 172 CA 2006 ­operates, namely (i) breach of duty per se (ii) the ‘hypothetical director’ test used in the derivative claim permission stage court hearing and (iii) reporting requirements, more specifically the Strategic Report and the Non-Financial Statement.

D.  Breach of Duty In relation to the duty’s actual enforcement the picture is grim. As Davies explains, the subjective test inherent in section 172 CA 2006 means that ‘litigation is likely to be relatively uncommon and probably even less often successful’ (Gower and Davies, 2012: 543). As stated: ‘This is because it is very difficult to show that the directors have breached this duty of good faith, except in egregious cases or cases where the directors have, obligingly, left a clear record of their thought processes leading up to the challenged decision’ (ibid). The conclusion that can be drawn in relation to section 172 CA 2006 when discussed through the prism of ‘enforceability’ and accountability, is that although the duty establishes a right, it does not come with a clear remedy, thus making it highly problematic as an accountability mechanism to be used by the company against directors. Case law post the enactment of the section remains unhelpful in relation to whether the renewed approach towards decision-making that the section aspired to introduce has actually transpired in practice. There are only few cases to date which address the section, most of which, as outlined above, suggest that it simply codifies the pre-existing law (eg Re Southern Fresh Foods Ltd [2008]; Re West Coast Capital (LIOS) Ltd [2008]). A judicial review of section 172 CA 2006 provided by Grier provides a good account of the problems associated with bringing an action against the directors using section 172 CA 2006 as a basis (Grier, 2014: 100). Cases that do in fact apply the section have focused on section 172(1)(f), i.e. on the aspect relating to the need to act fairly as between members of the company (eg West Coast Capital (LIOS) Ltd, Petitioner [2008]; Hughes and Weiss [2012]; Philips v Fryer [2013]). One case in particular stands out, as it arguably qualifies as the only case, which refers to the issue of the failure to have regard to the various factors addressed in section 172(1)(a)–(e). In fact, the case does not even involve a claim brought against the directors, but rather a judicial review of the Government’s role as the majority shareholder with regard to the way in which the company was being managed. In R (People & Planet) v HM Treasury ((2009) EWHC 3020) permission to apply for judicial review was made, in order to bring proceedings against

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HM Treasury concerning the handling of its indirect investment in Royal Bank of Scotland (RBS). The Government held an interest in RBS through a 70 per cent shareholding in RBS via a company, UK Financial Ltd (‘UKFI’), which was itself held 100 per cent by HM Treasury. The HM Treasury issues guidance for public sector bodies on how to appraise proposals before committing funds to a policy, programme or project and the Green Book constitutes a set of guidelines which describe how the economic, financial, social and environmental assessments of a policy, programme or project should be combined (‘The Green Book’ Appraisal and Evaluation in Central Government). The argument the applicant made was that through its shareholding, HM Treasury, should have prompted RBS to adopt a policy that was more protective of the environment and of human rights than the one it had in place, in view of the fact that HM Treasury was bound by the Green Book guidelines. The Court found that that the officials conducting the Green Book Exercise had correctly identified the proper way in which social and environmental considerations are to be taken into account in accordance with the duty and that the HM Treasury should not have sought to go beyond that to impose its own policy in relation to combatting climate change and promoting human rights on the Board of RBS. It was found that this would not only conflict with the duties of the board of RBS as set out in section 172(1) CA 2006, but would also have given a real risk to litigation by minority shareholders complaining that the value of their shares had been affected by the Government seeking to impose its policy on RBS.

E.  The ‘Hypothetical Director’ Test So, where else can one find evidence of the section’s utility if not through its strict enforcement in a case of a breach of the director’s duty? The ‘hypothetical director’ test used in the statutory derivative claim under Part 11 of CA 2006 (sections 260–69) is another part of the Companies Act whereby recourse is made to section 172 CA 2006. The case law on how the court interprets the section, largely reinforces the point that it is the financial merits of the claim versus the company’s interests, that the Court will consider. At the second stage of shareholders establishing that they have a prima facie case to be given leave by the Court to pursue the derivate claim on behalf of the company, the court must consider whether to grant permission to the shareholder to proceed with the action by reference to a series of factors. By section 263(2)(a) and 263(3)(b) of CA 2006, the court must deny permission if a hypothetical person acting in accordance with the duty to promote the success of the company would not seek to continue the claim (see also Franbar Holdings v Patel and others [2009] 1 BCLC 1, Kiani v Cooper [2010] 2 BCLC 427 and Mission Capital Plc v Sinclair and others [2008]. In Iesini v Westrip (2011), Lewison J listed a number of relevant factors to be taken into account, which include the size and the strength of the claim, the cost of proceedings and the company’s ability to fund proceedings, the ability of potential

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defendants to satisfy any judgment and the impact on company of defeat in terms of costs and the disruption of activities. Mention to the derivative claim highlights the utility of section 172 CA 2006 in this respect and at the same time points to the fact that the set of factors that the court considers are centred around establishing the business case of any decision, rather than enlightened decision-making.

F. Reporting Requirements CA 2006 and Corporate Governance Code Clear reference to section 172 CA 2006 is made in the reporting requirements set out in the CA 2006. Reporting requirements in the UK represent the facilitative ap­proach that the Government adopts towards businesses (Ferran: 23).­ Section 414A CA 2006 requires the board of directors of companies to which the section applies to, to produce a Strategic Report. Section 414C(1) CA 2006 ­outlines the report’s purpose, which is to inform the members of the company and to help them assess how the directors have performed their duty under section 172 CA 2006. Section 414C(4) CA 2006 specifically provides that the review must, to the extent necessary for an understanding of the development, performance or position of the company’s business, include an analysis using financial key performance indicators, and where appropriate, using other key performance indicators, including information relating to environmental matters and employee matters. Sections 414C(7) and 414C(8) CA 2006 provide additional details relating to the content of the strategic report in the case of a quoted company. Section 414C(7) CA 2006 indicates the requirement for the report to include: (a) the main trends and factors likely to affect the future development, performance and position of the company’s business, and (b) information about—(i) environmental matters (including the impact of the company’s business on the environment), (ii) the company’s employees, and (iii) social, community and human rights issues, including information about any policies of the company in relation to those matters and the effectiveness of those policies.

As of 1 January 2017 The Companies, Partnerships and Groups (Accounts and Non-Financial Reporting) Regulations 2016 implemented the Non-Financial Reporting Directive (2014/95/EU) in the UK applying in relation to financial years commencing on or after 1 January 2017. These amend Part 15 of the Companies Act 2006 by inserting two new sections, namely section 414CA and 414CB following section 414C. These sections now impose a reporting obligation on large ­public-interest entities, such as listed companies and qualifying partnerships, banks, insurance undertakings and other companies, to disclose relevant nonfinancial environmental and social information in their strategic reports. Section 414CB sets out the content of the non-financial information statement, which includes environmental matters (including the impact of the company’s business on the environment), the company’s employees, social matters, respect for human rights, and anti-corruption and anti-bribery matters.

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It is apparent that an overlap exists between the enhanced business review that quoted companies (irrespective of their size or the number of their ­employees) are required to produce as part of the strategic report and the statement imposed by the Regulations, which does indicate that compliance with new ­section 414CB (1)–(6) is deemed to fulfil some of the requirements for non-­ financial information contained in Section 414CB(7). Again, mention to the reporting requirements merely highlights the utility of the factors signposted in section 172 CA 2006. In addition to the above requirements, sections 415–18 of the CA 2006 impose a duty to prepare a Directors’ Report for each financial year of the company (original ­Section 417 CA 2006). Also, according to the Corporate Governance Code provision C.2.2, boards are also required to include a ‘Viability Statement’ in the Strategic Report to investors, which is assumed to provide an improved and broader assessment of long-term solvency and liquidity.

III.  Proposals for Reform: Challenges and Justification A. Proposal for Reform of the Code: Inclusion of ‘Section F: Relations with Stakeholders’ The Corporate Governance Code implicitly touches upon the aims and objectives which certain aspects of section 172 CA 2006 aspire to achieve, across a wide array of the Code’s provisions. Notably, Principle C.2, does indeed provide for Risk Management and Internal Control, and prompts the board to identify, assess and monitor the principal risks that the company may be subject to in their annual report. Stakeholders’ interests could be seen as part of, as well as separate to, this type of risk assessment. The Code does not explicitly refer to stakeholders or other aims and objectives in the manner in which the wording of section 172 CA 2006 does. The text that could be introduced in the Corporate Governance Code would necessarily require the creation of a new section, namely ‘Section F: Relations with Stakeholders.’ The section would adequately endorse the OECD Principle IV regarding the role of stakeholders in corporate governance which provides that: ‘The corporate governance framework should recognise the rights of stakeholders established by law or through mutual agreements and encourage active cooperation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises’ (OECD Principles, 2015: 34). In this respect the Corporate Governance Code Section F should stipulate that: Main Principle There should be a dialogue with stakeholders based on the mutual understanding of objectives. The board as a whole has responsibility for ensuring that a satisfactory ­dialogue with stakeholders takes place and that during the board’s decision-making ­process the board has regard (amongst other matters) to—

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(a) the likely consequences of any decision in the long term, (b) the interests of the company’s employees, (c) the need to foster the company’s business relationships with suppliers, customers and others, (d) the impact of the company’s operations on the community and the environment, (e) the impact of the company’s operations on social and human rights issues, (f) the desirability of the company maintaining a reputation for high standards of business conduct.

A provision prompting companies to adopt an enlightened shareholder approach in decision-making is not foreign to other jurisdictions, nor to the needs of ­current times. An innovative aspect of the Dutch Corporate Governance Code, revised in 2016, which came into effect 1 January 2017, requires the ­management board to formulate a vision on long-term value creation and a strategy for the realisation of this vision, which has been set in place on the assumption that it ensures that the company devotes sufficient attention to the tenability of the strategy in the long term, stating that when developing the strategy attention should be given to among others, the interests of stakeholders (Dutch Corporate Governance Code, 1.1.1. ‘Long-term value creation strategy’ 8 December 2016 edition). Long-term sustainable development has similarly been addressed by the International B ­ usiness Council of the World Economic Forum, which issued ‘The New Paradigm, A Roadmap for an Implicit Sustainable Long-Term Investment and Growth Corporate Governance Partnership between Corporations and Investors to achieve’ issued in September 2, 2016 (International Business Council of the World Economic Forum, 2016). It has also been established that the South African Corporate Governance Code, the King III (see eg Esser, 2014), was one of the pioneers in this respect, as it prompted the board to consider the interests of all legitimate stakeholders and not just those of the shareholders following the stakeholder inclusive model. King IV follows this approach. My proposal aligns with the concept of Environmental, Social and Governance, which appears in the United Nations Principles of Responsible ­Investment and refers to extra-financial material information about the challenges and ­performance of a company on these aspects, enabling shareholders to better assess risks and opportunities. The proposal also aligns with the objective that the ­private sector is expected to play a large role in the implementation of the UN’s sustainable development goals (UN, ‘Transforming our world: the 2030 Agenda for Sustainable Development’ 21 October 2015) notwithstanding that currently it is reported that fewer than half of global companies plan to engage with the UN’s sustainable development goals (SDGs) (Ethical Corporation, 2016).

B.  Challenges to the Proposal Admittedly, one might object to this proposal insofar as the adoption of a stakeholder friendly provision in the Corporate Governance Code may lend itself to a

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series of adverse consequences. An argument could well be made that emphasis being placed on the soft law as the guarantor of stakeholders’ interests may cut off discussion on hard law reform that could possibly achieve the same objectives in a potentially more secure and transparent manner. At the same time, another ­argument which could also be made against the proposal put forward, concerns the problems that surround compliance with the Corporate Governance Code more generally, especially in light of the fact that any type of compliance with the Code is assumed to be monitored by shareholders, which within the context of shareholders’ stewardship, would only ever mean indirect representation of stakeholders (Veldman and Willmott, 2016). Careful thought has been given to these well acknowledged concerns that arise from the shareholder/stakeholder debate more generally, as well as to the concerns that have been put forward in relation to the false assumption that soft law and the ‘comply and explain’ mode of regulation are the ideal form of regulation. The present chapter does not claim to offer an all-encompassing solution to the complex set of issues on problems relating to the utility of the corporate governance code in general, to problems relating to the compliance and enforcement of the code and problems with shareholder stewardship. The adoption of a stakeholder friendly provision in the FCA Corporate Governance Code does not aim to substitute hard law reform that could possibly achieve the same objectives in a potentially more secure and transparent manner. The proposal made also does not exclude other proposals that advocate in favour of more direct stakeholder governance. Monitoring and enforcement of this principle of the Code is an aspect of this regulatory reform which could be further expanded on by providing other stakeholders with the right to identify noncompliance and lobby for compliance, or by providing the regulatory authority with more powers and transparent procedures to ensure compliance of companies with the Code. Soft law can be seen as a politically palatable option and the proposal put forward also appears to fit the agenda of shareholder stewardship, and further extends it. Furthermore, it could be easily argued that the recommendation of introducing section 172 of the Companies Act 2006 into the Corporate Governance Code is not only adopting a cautious and a rather safe approach to reform, but that such a proposal may prove equally as ineffective as is the current status quo, if not more so. One should not overlook however that it is often the case that radical proposals, which are harshly unfriendly towards the business community and towards less progressive policy makers, are rarely endorsed. So, in introducing this proposal, the author has also taken into account what is politically viable in terms of ways forward, as well as a proposal which enables a safe means via which to test within a reasonable time frame the utility of such a proposal. It is beyond the scope of this research to recommend a complete overhaul of the UK’s problematic, in many respects, system of ‘comply or explain’ or problematic architectural framework regarding compliance.

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C.  Justification for the Proposal Adopting such a provision in the UK Corporate Governance Code does not merit value merely because of the need to follow current trends and global or other domestic standards. There are sound reasons for adding such a provision in the Code, which include: (i) enhancing the section’s visibility and overall utility, (ii) the limitations of hard law and (iii) necessity, considering the current ­socio-political environment facing the UK.

i.  Signalling and Enhancing the Section’s Utility Were the section indeed to be placed in the Corporate Governance Code, a ­question would arise in relation to the section’s utility. Is there any indication that shareholders would make use of such a section when exercising their voting, in order to place pressure on boards and to promote what can be considered ‘better governance’ along the lines of what is outlined in the factors of section 172 CA 2006? It must be acknowledged that a grim picture has been painted of shareholder activism, especially that of institutional shareholders (Hughes, 2009). Nevertheless, the role of shareholders in enforcing the Code remains an important one, even if not the strongest or the sole means available to secure the corporate governance of companies (Section E, Corporate Governance Code). Examples do exist whereby shareholders, as well as other bodies, use the Corporate Governance Code provisions as a useful basis to challenge management on non-shareholder related issues. In May 2017, Royal Dutch Shell (RDS) shareholders, including the Church of England, European pension funds and Dutch activists, tabled a resolution for Shell’s annual general meeting, asking the company to establish carbon emission reduction targets, sending a signal to the board of the Anglo-Dutch company to set new climate change goals (Vaughan, 2017). ClientEarth, a London based law firm, in August 2016 alerted the UK financial regulator to reporting breaches by two oil and gas companies, SOCO International Plc and Cairn Energy PLC, which failed to adequately disclose climate change risks to their businesses in their 2015 strategic reports (ClientEarth, 2016). As a result, the companies updated their disclosure practices as a direct result of ClientEarth’s complaint to the FRC, but the regulator has not made the results of its investigation public (ClientEarth, 2017). TESCO Supermarkets shareholders protested against Tesco’s failure to pay the ­Living wage to its employees resulting in the taxpayer having to make up the shortfall through tax credit payments at TESCO’s AGM (Poulter and Steiner, 2015). Sports Direct shareholders similarly protested at its meeting, regarding the firm’s pledge to improve working conditions, following the sportswear chain’s lawyers’ ­critical report of the company’s working conditions, advocating in favour of a new, fully independent review of company practices (BBC News, 2016). More recently, on environmental issues, albeit in the US, ExxonMobil investors at ExxonMobil’s annual meeting voted with a 62 per cent majority vote in favour of a shareholder proposal calling on the oil and gas giant to assess and disclose how it is preparing its business for the transition to a low-carbon future (Ceres, 2017).

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ii.  The Limitations of Hard Law An argument could be made that there is no need to resort to transposing the rationale of section 172 CA 2006 into the soft law sphere, but rather focus on the section’s weaknesses in terms of its enforcement and proceed to the reform of the section per se so as to enhance its own utility and enforceability (eg Re ­Southern Fresh Foods Ltd [2008]; Re West Coast Capital (LIOS) Ltd [2008]). Conclusions drawn following a judicial review of section 172 CA 2006 by Grier provide that the few cases which refer to section 172 CA 2006 may be an indication of the following broader problems surrounding hard law provisions within the sphere of directors’ duties. An interpretation provided by Grier is that section 172 CA 2006 has not been utilised because: the right provided by the ­section is not a realistic way of solving a problem involving directors’ neglect of stakeholder interests indicates in section 172(1)(a)–(e); most shareholders do not know about the section and if they do, do not care enough to do anything about it; the costs of bringing a ­petition puts potential petitioners off and even if the petitioner has a point, the bad publicity that would be attracted to the company by a court case, would probably have a deleterious effect on the company’s share price; where there are problems with a listed company’s directors, by far the easiest solution is for shareholders’ to sell their shares; and finally, it is often the case that directors are not worth suing (Grier, 2014). Beyond the practical reasons usefully articulated by Grier above, another reason against reinforcing the section’s hard law utility is the reality of the politics of UK law-making within the corporate law sphere, which is overall more favourable towards soft law. There are historical reasons behind the evolution of the UK’s system of self-regulation, which include the rise of institutional investors which transformed the dynamics that exists within British business to date (Cheffins, 2008). In addition to this, the English version of the US business judgment rule, whereby courts will not interfere in the assessment of the business judgment made by the board of directors, is engrained into the UK legal system, so that the change that many more progressive company law scholars may wish to see effected by the courts, is likely to never come.

iii.  Necessity Amidst Scandals and BREXIT Process Despite this light regulatory touch, the final justification for reinforcing the Corporate Governance Code through an adoption of an equivalent provision is that of necessity. The scandals of BHS, Sports Direct, as well as the current uncertainties surrounding the UK’s position as the BREXIT negotiations unfold, 2nd the decision of the USA to opt out of the Paris Climate Change Agreement in June 2017 (Sevastopulos, Jopson and Clark, 2017), all make it imperative to c­ onsider a new approach to prompting businesses to behave in a sustainable manner with due consideration to stakeholders’ interests. Especially with the UK leaving the EU, it is a critical time to discuss enlightened decision-making on UK boards (Dallas, 2017). The UK has with its EU membership been prompted to ­consider

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the interests of other constituencies across a wide range of company and securities law Acts and regulations. The UK with its entry to the EEC, now European Union, was expected to comply with EU company law legislation and the CA 2006 is one of the opportunities taken to adopt in statutes various EU company law and securities regulation requirements. This will not necessarily remain the case if a key regulatory instrument, such as the Corporate Governance Code, does not give a clear signal that the stakeholder approach is afforded some level of protection. The fear of the UK addressing issues differently in a post BREXIT environment is a real one.4 There are sound reasons to be weary of a change in this respect in light of the UK’s commitment to leave the EU. There has been a drastic shift away from the argument made in the early 2000s, put forward in the seminal article by Hansmann and Kraakman (2000), who argued that with the impact of globalisation, company law systems will converge to the more efficient model of shareholder primacy. The Company Law Review Steering Group drafted the duty in such a way so as to prompt directors to take a properly balanced view of the implications of decisions over time and to foster effective relationships with other stakeholders so as to ensure the company’s longterm success (Company Law Reform (DTI, 2005)). Arguably it has been the EU influence that has in fact led to the inclusion of other interests into the Companies Act 2006, namely section 172 CA 2006. The codification of directors’ duties in the Act in particular, unlike other cases, was not a case of a direct implementation of a particular Directive within this area of company law, but rather part of a broader plan to adopt statutes that would replace the common law, in order for the UK to come closer to the continental European style of legislation. The light touch reform could possibly also be attributed to the fact that the reforms took place in the era of Tony Blair and Patricia Hewitt, the recently ‘at the time’ appointed Labour government. Ferran explains that, in reviewing the corporate law proposed reforms of that time, consideration should be given to the fact that the then elected Labour government wanted to avoid radical changes, as it did not want to risk alienating business interests (Ferran, 2001: 17), which policy it had itself confirmed (DTI, March 1998: paragraph 7.5). A proposal therefore to transpose the rationale of the provision in the Corporate Governance Code is not only in line with the market-based tradition of UK corporate governance, i.e. ‘comply or explain’, but also constitutes a proactive form of regulation at a stage in time when the events that are likely to follow the political effects of BREXIT demand it. The UK’s withdrawal from the EU will result in non-direct effect and non-applicability of EU company legislation, so the political need to ‘sell’ the UK as a ‘business friendly’ environment will emerge (House of Commons, Business, Energy and Industrial Strategy Committee, 2017). 4  Regarding the need for the UK to maintain its reputation as a hub business activity and investment see the statement of the Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy, Margot James MP on 7 December 2016 in introducing the Companies, Partnerships and Groups (Accounts and Non-Financial Reporting) Regulations, placing emphasis on the parallel need to re-examine whether certain aspects of company law are cost-effective.

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The promotion of such an objective includes the need to showcase that the UK encourages corporations to incorporate relevant sustainability, ESG (environmental, social and governance), the UN’s Sustainable Development Goals (SDGs) and CSR (corporate social responsibility) considerations in developing their longterm strategies and operations planning. The UK’s withdrawal from the EU is also likely to result in stakeholders being even less likely than before to be given a central place in the government’s agenda. It is unlikely that stakeholders will feature as the main actors in hard law legislation, as more progressive scholars may have hoped for.5 At the same time, recent corporate scandals, including the BHS scandal, have put pressure on the elected Government to proactively address the corporate failures through more regulation, so the proposal put forward by this chapter may in fact constitute a good compromise that may produce some of the desired effects of companies’ better governance.

IV. Conclusion Continuing with the inclusion of section 172 in the Companies Act 2006 as a safeguard for stakeholders’ interests is futile. Not so much because the section prioritises shareholders’ interests over stakeholders’ interests, but because the mode of regulation that the Company Act employs does not provide the substantive content of this section with the visibility that is necessary for it to be functionally a viable way of stakeholders’ featuring in corporate decision-making as a matter of best practice. Section 172 CA 2006 gives the illusion to the business community, regulators, certain scholars, and market players alike, that something is being done in the sphere of company law in relation to acknowledging stakeholders’ interests in corporate decision-making. As the chapter has advocated, this is far from being the case. The proposal also aligns with the BEIS Committee’s proposal following the response to the Corporate Governance Green Paper, which recommends to the FCA to amend the Code to require information narrative reporting on the fulfilment of section 172 CA 2006 duties (House of Commons, Business, Energy and Industrial Strategy Committee, 2017: 60, conclusion no 5). The proposal put forward by this chapter is one which in the author’s view adequately reflects the reality of how the UK regulatory market is accustomed to operating and should only be seen as one of a range of tools the government should put in place to strengthen stakeholders interests in companies. Making alternations for example on the issue on which parties are allowed to monitor whether the Code has been complied with and on what basis could also complement this proposal.6 5  See as an example of backtracking the stance taken on employee participation on boards as advocated by PM Theresa May in her governmental speech in July 2016 compared to the Green Paper November 2016 proposal introducing optional committees comprised of employees. 6  See argument put forward at Cass Business School and Frank Bold Law Firm, London, Corporate Reporting event, 7 June 2017, that monitoring of compliance with the Code should not only lie in the hands of shareholders, but also in the hands of other stakeholders, who, as Professor Charlotte Villiers argues, may have greater incentives to monitor.

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Recently, ­recommendation has also been made by the BEIS Committee that the FCA is provided with additional powers so as to hold to account company directors in respect of the full range of their duties and specifically section 172 CA 2006 (House of Commons, Business, Energy and Industrial Strategy Committee, 2017: 61, conclusion no 8). Other initiatives, as are the introduction of new corporate formats for cooperatives and social enterprises, all fall within the agenda of changing the current status quo followed in UK corporate governance to a more progressive one.

References ‘Company Directors: Regulating Conflicts of Interest and Formulating a Statement of Duties’ LC Rep No 261, Scot Law Com No 173, London, 1999. ‘The Green Book’ Appraisal and Evaluation in Central Government available at www.gov.uk/government/publications/the-green-book-appraisal-andevaluation-in-central-governent. ‘Transforming our world: the 2030 Agenda for Sustainable Development’ 21 October 2015 17th session adopted by the General Assembly of the United Nations on 25 September 2015, on the 2030 Agenda for Sustainable Development, which contains 17 Sustainable Development Goals and 169 targets. BBC News ‘Sports Direct hears shareholder anger at annual meeting’ (7 September 2016). Berle, A (1932) ‘For Whom Are Corporate Managers Trustees: A Note’ 45 Harvard Law Review 1365. Brady v Brady [1998] BCLC 20, CA. Ceres ‘ExxonMobil Investors Make History with Majority Vote on Climate Risk Disclosure’ (31 May 2017). Charterbridge Corp Ltd v Lloyds Bank Ltd [1970] Ch 62. Cheffins, B (2008) Corporate Ownership and Control: British Business Transformed (Oxford, Oxford University Press). ClientEarth news item, ‘ClientEarth complaint prompts transformed climate reporting from oil and gas firms’ (28 April 2017) available at www.clientearth.org/ clientearth-complaint-prompts-transformed-climate-reporting-oil-gas-firms/. —— ‘ClientEarth triggers review of companies’ climate disclosures (22 August 2016) available at www.clientearth.org/clientearth-triggers-review-companiesclimate-disclosures/. Company Law Reform (DTI, 2005), Cm 6456, paragraph 3.3. Company Law Review, Company Law Reform White Paper, DTI (March 2005). Dakers, M (2016) ‘BHS collapse: Pension all you need to know’ The Telegraph (26 April 2016). Dallas, G (2017) ‘Brexit could be a corporate governance car crash in slow motion’ The Financial Times (7 May 2017).

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Davies, P (2005) ‘Enlightened Shareholder Value and the New Responsibilities of Directors’ Lecture delivered at the University of Melbourne Law School (the inaugural WE Hearn Lecture) 4 October 2005 available at http://law.unimelb. edu.au/__data/assets/pdf_file/0014/1710014/94-Enlightened_Shareholder_ Value_and_the_New_Responsibilities_of_Directors1.pdf. Davies, PL and Worthington, S (2012) Gower and Davies Principles of Modern Company Law 9th edn (London, Sweet & Maxwell). Department for Business, Energy and Industrial Strategy (2017), ‘CORPORATE GOVERNANCE REFORM—The Government response to the green paper consultation’ August 2017, available at http://www.wlrk.com/docs/corporategovernance-reform-government-response.pdf. Department of Trade and Industry, Ministerial Statements, Companies Act 2006, Duties of Company Directors (2007), Lords Grand Committee (6 February 2006, col 256) available at www.berr.gov.uk/files/fi le40139.pdf. Dodd, E (1932) ‘For whom are Corporate Managers Trustees?’ 45 Harvard Law Review 1145. Dutch Corporate Governance Code, 1.1.1. ‘Long-term value creation strategy’ 8 December 2016 edition. Duties of Company Directors (DTI, June 2007), Ministerial Statements, Introduction and Statement of Rt Hon Margaret Hodge. Employee participation and company structure in the European Community COM (75) 570, November 12, 1975, Bulletin of the European Communities, Supplement 8/75. Esser, Irene-Marie (2014) ‘Shareholder Interests and Good Corporate Governance in South Africa’ 77 Journal of Contemporary Roman-Dutch Law 38–52, available at SSRN: https://ssrn.com/abstract=2487850. Extrasure Travel Insurance Ltd v Scattergood [2003] 1 BCLC 598. Fama, EF, and Jensen, MC (1983) ‘Separation of Ownership and Control’ 26 Journal of Law and Economics 301. Fama, E (1980) ‘Agency Problems and the Theory of the Firm’ 88(2) Journal of Political Economy 288. Ferran, E (2001) ‘Company Law Reform in the UK’ available at at https://ssrn. com/abstract=294508 or http://dx.doi.org/10.2139/ssrn.294508. Final Report of June 2013—Changing Banking for Good: Report of the Parliamentary Commission on Banking Standards, HC 175-II. Fisher, D (2009) ‘The Enlightened Shareholder—Leaving Stakeholders in the Dark: Will Section 172 (1) of the Companies Act 2006 make Directors Consider the Impact of their Decisions on Third Parties’ International Company and Commercial Law Review 10. Foss v Harbottle (1843) 2 Hare 461. Franbar Holdings v Patel and others [2009] 1 BCLC 1. Gaiman v National Association for Mental Health [1971] Ch 317. Green Paper on Corporate Governance (Department for Business, Energy and Industrial Strategy) (29 November 2016).

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Grier, N (2014) ‘Enlightened Shareholder Value: Did Directors Deliver?’ Juridical Review 95. Hansmann, H, and Kraakman, R (2000) ‘The End of History for Corporate Law’ Harvard Law School John M Olin Center for Law, Economics and Business Discussion Paper Series Paper 280. House of Commons, Business, Energy and Industrial Strategy Committee ‘Corporate Governance’ Third Report of the Session 2016-2017 HC 702 published on 5 April 2017. Hughes and Weiss [2012] EWHC 2363 (Ch). Hughes, J (2009) ‘FSA chief lambasts uncritical investors’ The Financial Times (11 March 2009). Hutton v West Cork Railway (1883) 23 Ch D 654. International Business Council of the World Economic Forum, ‘The New Paradigm, A Roadmap for an Implicit Sustainable Long-Term Investment and Growth Corporate Governance Partnership between Corporations and Investors to Achieve’ issued 2 September 2016. Jensen, M and Meckling, W (1976) ‘Theory of the Firm: Managerial Behaviour, Agency Costs, and Ownership Structure’ 3 Journal of Financial Economics 305. Jopson, B, and Eagelshaw, J (2006) ‘Companies Law Reform Threat to Directors’ Financial Times (8 March 2006). Keay, A (2011) ‘Moving towards Stakeholderism? Constituency Statutes, Enlightened Shareholder Value, and More: Much Ado about Little?’ 22(1) European Business Law Review 1. —— ‘The Duty to Promote the Success of the Company: Is it Fit for Purpose?’ available at www.law.leeds.ac.uk/assets/files/research/events/directors-duties/ keay-the-duty-to-promote-the-success.pdf. Kershaw, D (2001) Company Law in Context 2nd edn (Oxford, Oxford University Press). Kiani v Cooper [2010] 2 BCLC 427. Law Commission, Company Directors: Regulating Conflicts of Interest and Formulating a Statement of Duties (Law Com no 261, 1999) and the Consultation Paper (LCCP 153, September 1999). Lynch, I (2012) ‘Section 172: a Ground-breaking Reform of Directors’ Duties, or the Emperor’s New Clothes?’ 33(9) Company Lawyer 196. Marshall, S, and Ramsay, I (2012) ‘Stakeholders and Directors’ Duties: Law, Theory and Evidence’ (2012) Forum: Stakeholders and Directors’ Duties: Law, Theory and Evidence, 291 available at www.unswlawjournal.unsw.edu.au/sites/default/ files/12_marshall_2012.pdf. Mission Capital Plc v Sinclair and others [2008] BCC 866. Modern Company Law for a competitive economy-The Final Report Department of Trade and Industry, Modern Company Law for a competitive economy-the Final Report (The Stationary Office, 2001). Okoye, N (2012) ‘The BIS Review and Section 172 of the Companies Act 2006: what Manner of Clarity is Needed?’ 33(1) Company Lawyer 15.

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8 Corporate Governance, Responsibility and Compassion: Why we should Care CHARLOTTE VILLIERS

I. Introduction Our planet is under threat. Natural resources are being depleted, the climate is changing, and there are more threats of national and global political conflicts. Among the culprits identified for these problems are large corporations because of their centrality to our increasingly interdependent world and how they operate, which appears to be on the assumption that the various parties— individuals, corporations, shareholders, workers and consumers—pursue their self-interest as much as possible. Thereby corporations seek to minimise costs and maximise profits, workers seek to maximise wages, and consumers seek to get products and services at a low cost (George, 2014: 8) resulting in environmental and social harm. The corporate world is filled with scandals and, as Ireland observes in this book, such scandals appear to be occurring more frequently. In 2016 alone, we observed the use of corporate vehicles for tax avoidance revealed in the ‘Panama Papers’, Tesco, among other companies, came under fire following its exploitation of a government ‘welfare to work scheme’ in 2012 (Topping, 2012), its meat adulteration scandal in 2013 (Lawrence, 2013), and for accounting fraud in 2015–16 (Butler, 2016). Late in 2015, Volkswagen was discovered telling lies about its diesel emissions thus cheating on its customers and contributing further to environmental damage (BBC, 2015). Sports Direct has been exposed for its oppressive employment practices and for paying its workers below the minimum wage (BEIS, 2016–17). The demise of BHS highlighted its exploitation of a loophole to cut its pensions levy and almost 1,000 of its supplier creditors were left unpaid by up to £52 million (HC 54, 2016–17). Multinational companies have faced criticism for their aggressive tax planning which has been deemed by the European Parliament as ‘incompatible with CSR’ (European Parliament, 2015). Commentators have

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concluded that ‘corruption, crime, cutting corners and suppressing the interests of less powerful parties remain the “name of the game”’ (Fleming, Roberts, Garsten, 2013: 342). Trust in the whole corporate law system—corporate vehicles, regulations, corporate lawyers and business actors—has been depleted, making necessary a transformation of our social consciousness, requiring both theoretical and structural change (Stone, 1986: 573–74 and 575). In this chapter, I argue that a key barrier to responsible corporate governance practice is the hierarchical structure of ‘traditional’ large corporations. This hierarchy, coupled with an individualistic, profit-seeking approach, obstructs the broader goals and possibilities of corporate governance. I use feminist literature and positive organisation scholarship to explore these problems. The ethic of care theory developed within the feminist literature has a relational focus which recognises the interdependencies existing inside and outside the organisation. Similarly, a literature has grown in the field of positive organisation scholarship emphasising compassion as a behavioural principle. This dual focused approach gives rise to a preference for a more horizontally structured organisation—rather than a bureaucratic and hierarchical form—to nurture the relationships involved, with greater care and compassion. This approach, it is argued, offers more fertile ground for positive corporate behaviour. The chapter will be structured as follows: In section II, after highlighting some corporate governance failures I will identify the structural obstacles to a successful corporate governance and responsibility culture. In section III I will outline the key features of the feminist theory of the ethic of care and the organisational compassion theory relevant in this context and I will suggest how these might provide a more helpful framework. In section IV, I will identify the structural features that might be developed under this theoretical framework. In section V I will highlight some of the implications for the existing company law and corporate governance systems. In section VI I will discuss some of the challenges and potential dangers. I will conclude with a vision for a more ‘gender mature’ and compassionate organisation.

II.  Structural Obstacles to Effective Corporate Governance and Responsibility Companies do good things and they can be a force for good but they also do bad things. The corporate governance system has not prevented the bad behaviours and nor has corporate social responsibility (CSR). Indeed, firms engaged in prior socially responsible behaviour have been found to be more likely to engage in socially irresponsible behaviour, their leaders having developed a sense of accumulated moral credits that may licence them to commit socially irresponsible behaviour in the future (Ormiston and Wong, 2013). Indeed, several CSR awards,

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such as a Climate Protection Award from the Environmental Protection Agency and a ‘Corporate Conscience Award’ from the Council on Economic Priorities (Anti CSR website) and leadership in terms of philanthropic CSR did not prevent the misdemeanours leading to the demise of Enron. Similarly, BP came top among the oil and gas sector companies for its environmental, sustainability and social impacts in the Tomorrow’s Value Rating in 2010, the year of its disastrous Deep Water Horizon spill that revealed breaches of environmental and health and safety regulations (Stout, 2012). The Telegraph comments: CSR departments are providing moral cover for companies that allow their own internal standards to get worse and worse. It has become a racket, and a damaging one—and the sooner it is closed down, the quicker companies can get on with cleaning up their behaviour where it actually matters. (Lynn, 2015).

Corporate structures and legal and regulatory structures are problematic— limited liability, shareholder distancing, boardroom power, directors’ duties and enlightened shareholder value still centre on shareholders and profit. As Testy remarks, directors’ duties, especially the duty of care, are not so far reaching in practice, since directors are largely protected from liability for breach of duty, as a result of the legal apparatus that provides them with a business judgement rule, indemnification and insurance cover, clauses giving them leniency within the company’s constitution, permission to rely in good faith on expert advice (Testy, 2004: 91). Corporations are really ‘a legal and ideological construct, organised to advance vested interests’ (Spencer, 2004: 26). Indeed, the most basic elements of the corporate culture include profit for individuals gained through hierarchical control and disconnection of corporate participants from one another (Cohen, 1994: 27). Dobson and White describe the firm as an abstract engine that facilitates behaviour ‘conceptualized entirely within the rubric of pecuniary value maximisation’ (Dobson and White, 1995: 467 referring to Miller, 1986). The contractarian model, for example, presents the firm as a collection of contracts through which people seek to maximise their opportunities (Glasbeek, 1995: 118) and pursue their self-interested goal of raising their personal wealth (Dobson and White, 1995: 468). Paternalistic corporate heads, who used to feel a sense of responsibility for their local community, are replaced with ‘managers who are more distant, more economically driven, more coldly rational in their decisions’ (ibid). The resulting corporate culture typifies a neoliberal, individualistic model, appearing as a hierarchical, profit-oriented capitalist patriarchy. A managerial hierarchy might be viewed as efficient and providing greater opportunities for energy, creativity, more rationalised productivity and greater morale (Jaques, 1990). However, in such a structural setting individuals become separate from others, ranked or hierarchically related to them (Lahey and Salter, 1985: 554 and 555). This gives rise to an individualistic and competitive culture with an ‘each man for himself ’ ethos, that encourages ‘caution with others, competitive, confrontational, and often combative behaviours’ (Dobson and White, 1995: 465–66).

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Such structures generate a differentiation of wealth and income among the members up and down the hierarchy, leading to a less beneficent culture. Thus, for example, Desai et al argue that higher income inequality between executives and ordinary workers results in executives perceiving themselves as being allpowerful and this perception of power ‘causes top managers to objectify lower level employees and view them as mere instruments to be used and discarded’ (Desai, Brief and George, 2010: 2). The laboratory study conducted by Desai et al showed that there was an exaggeration in the power perceived by managers with relatively higher income compared to their employees, possibly because the pay provides a symbolic and competitive distinction between different ranks and levels of power in an organisation. Workers regard the CEO as powerful and so it becomes a self-fulfilling phenomenon. Such power can lead to selfish, corrupt and mean behaviour toward lower level employees. Desai et al observe mean behaviours in Wal-Mart for ‘violating wage laws, failing to provide adequate health care to employees, exploiting workers, taking an anti-union stance, and violating human rights in foreign countries’ (ibid: 7–11). Desai et al explain that power can change people’s cognitions, motivations and behaviours and the experience of power results in viewing instrumentally those with less power (ibid: 7–11). This fits with the observations made by Neron, who suggests that ‘the kind of relations involved transform the already tricky command hierarchies into even more problematic ones, with unequal relations, characterized by asymmetries of power, class differentiation, arrogance and disrespect’ (Neron, 2015: 172). Might we achieve more positive outcomes and impacts if such hierarchies were flattened and a more relational approach pursued? The feminist and positive organisation studies movements may provide some answers to this question.

III.  Feminist theory and Positive Organisation Studies: Care and Compassion Feminist theories frequently criticise liberal and neoliberal theories for their ­presentation of atomised individuals and their failure to recognise the inherent social nature of human beings (Cohen, 1994). Indeed, radical feminists see the corporation as serving the needs of a capitalist patriarchy with emphasis on efficiency, discipline and control (Cohen, 1994: 27). The traditional corporation is viewed as masculinised, bureaucratic and hierarchical in which workers are objectified, management is separated and formalised, and the structural origins of human problems and facts of life such as sexuality, emotionality and procreation, are ignored, leading to family unfriendly workplaces (Bird and Brush, 2002: 46). Thus corporations are seen as aggregations of individuals characterised by profit-seeking, aggressiveness in the market and toward competitors, and the accumulation of wealth and property (Cohen, 1994: 23 citing Eisenberg, 1989).

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The hierarchy that characterises traditional (masculine) organisations ‘distances ownership, management and operations from one another along lines of control, and channels communication’ (Bird and Brush, 2002: 52). Such organisations are geared towards financial profits and ‘time-related goals’ (ibid) as well as quality control and use of reward systems that link performance to financial and career rewards (ibid: 53), and job evaluations, based on ‘abstract differentiations, are utilised to rationalize the organizational hierarchy’ (Acker, 1990: 148). Hierarchy is taken for granted and presented as an acceptable principle (Acker, 1990: 148). This has a dehumanising effect in which people, whose personalities ‘are denied or neutralised’, are required to perform according to the demands of the economy or bureaucracy (Habermas, 1981: 308, cited in Nelson, 2012: 5). The resulting effect is ‘to distort, rather than illuminate, our social reality’ (Nelson, 2011: 71). Why not rely on stakeholder theory, in so far as it entails recognition of needs beyond those of just the shareholders? Stakeholder theory has limitations. Wicks et al note that the stakeholder concept has been shaped by individualistic and masculine metaphors including: corporations as autonomous entities, conflict and competition influencing how firms should be managed, emphasising that strategy formulation should be objective, and power and authority should be embedded in strict hierarchies. Furthermore, stakeholder theory relies on economic, rather than ethical, justification and has a practical managerial orientation. In stakeholder theory responsibilities are limited to firm specific stakeholders and to create value for those stakeholders rather than focusing on societal needs. Stakeholder theory would limit the possibilities of social responsibility and would demand that CSR activities result in financial gain (Brown and Forster, 2013). In this way, Solomon notes that commitment to employees ‘typically runs thin when profits sour, the stock starts to sputter or, worst of all, the company becomes an attractive “target” for a takeover artist’ (Solomon, 1998: 517). Recognising such limitations of ­stakeholder theory, Wicks, Gilbert and Freeman discuss the possibility of reinterpreting the stakeholder concept from a feminist perspective, in particular, from the ethic of care developed by Carol Gilligan in her work, In a Different Voice (Wicks, Gilbert and Freeman, 1994). This feminist approach allows us to see corporations as webs of relations among stakeholders: the us/them and internal/external distinctions change into a communal solidarity in which one sees the corporation as constituted by the network of relationships which it is involved in with the employees, customers, suppliers, communities, businesses and other groups who interact with and give meaning and definition to the corporation (Wicks, Gilbert and Freeman, 1994: 485).

The focus is consensus building and trust and communication (Burton and Dunn, 2005: 457). Chaos and environmental change would no longer be viewed as threats to the corporation but as ‘important vehicles for creating diversity, offering new opportunities, and reflecting the natural processes of change’ (Wicks, Gilbert, F ­ reeman, 1994). The impulse is to create harmonious relationships with one’s environment, to nurture and sustain it as well as oneself, rather than to

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try to conquer and control it. This more collaborative approach might reduce temptations of greed and seeking top hierarchical positions and adopting a care obligation might deter exploitation of the power arising from unequal relationships (Machold, Ahmed, Farquar, 1998: 665). Within the feminist network concept, moral decision-making is centred on ­preserving the relational connections which encourages recognition of responsibility for one another (Bird and Brush, 2002: 45). This relational approach views collective power as the source of a corporate entity’s strength. The corporation is not to be seen just as an aggregation of individuals. Under the feminist ethic of care, the legal justification for the existence of the corporate form ‘must be the advancement of the social good as well as the enhancement of corporate and individual profit’ (Cohen, 1994: 23). Both the profit motive and the compassion motive can be pursued through the same organisational structure. Gilligan’s In a Different Voice identified the concepts of responsibility and care as central issues for moving from ‘an initial concern with survival to a focus on goodness and finally to a reflective understanding of care as the most adequate guide to the resolution of conflicts in human relationships’ (Gilligan, 1982: 698). This approach underlines that connection to others throughout life is important and that we all need compassion and care (ibid: 696). Gilligan tells us that the ethic of care revolves around recognition of the interdependence between self and others (ibid: 696), as a relationship of mutuality in which each participant contributes to the creation and maintenance of a ‘larger relational unit’ (Held, 1990: 341). All individuals are connected to others and dialogue becomes the principal means of moral deliberation (Liedtka, 1996: 180). If we accept that people are fundamentally relational and dependent on each other, care becomes a basic requirement of all human societies and communities (Noddings, 2003; Tronto, 2003; Lawrence and Maitlis, 2012). Tronto tells us that: Care requires that humans pay attention to one another, take responsibility for one another, engage in physical processes of care giving, and respond to those who have received care. Acknowledging these four care phases would require us to see people as ‘constantly enmeshed in relationships of care (Tronto, 1995: 142).

Thus, ‘families, welfare states, and the market are all institutions that provide care’ (ibid) and ‘care is not solely private or parochial; it can concern institutions, societies, even global levels of thinking’ (ibid: 145). Andre and Pache interpret Tronto’s four phases of caring as engaging in a particular goal—making our world better by caring about each other’s needs—and engaging in a particular process—relying on empathic dispositions and practices to fulfil each other’s needs. A ‘connected self ’ might be better equipped to make morally strong decisions than would be the separated self because the self remains aware of the other and their relationship has to be maintained (Dobson and White, 1995: 464–65; White, 1992: 57). The connection to others brings community and society into the frame, which is the focus of the social justice strand of feminism (Kalsem and Williams, 2010).

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Social justice feminism emphasises community, nurturing and connectedness between persons, such emphasis being characteristic in female lives (Callaghan and Roberts, 1995: 1206). The aim is to improve the welfare of women and society (Kalsem and Williams, 2010: 154; Zimmerman, 1991: 191–92). Social justice feminism recognises the multiple oppressions that might be at play and urges change to be sought from the bottom up (Kalsem and Williams, 2010: 160). It is also structural in its orientation, ‘identifying issues that contribute to systemic subordination and developing theories and strategies for change’ (ibid: 161). From the above we can see that a feminist perspective observes a corporation as a collective entity that is beyond the aggregation of individuals and so would recognise the qualities of caring and nurturing, and would suggest an alternative based on responsibility, connection, ethics of care and sharing (Cohen, 1994: 23; Lahey and Salter, 1985: 556). This shift towards a feminist perspective would give precedence to interpersonal relationships over autonomy and the organisation would include for consideration, rather than exclude, ‘the whole person, especially “private” aspects such as emotion, sexuality, race and family issues’ (Bird and Brush, 2002: 46). An ethic of care approach reveals that ‘ostensibly private problems and issues are the result of public, political processes’ and that ‘struggles are rooted not in problematic individuals or groups but in problematic social and cultural conditions’ (Lawrence and Maitlis, 2012: 648). From this perspective the important observation is that the ‘public’ and the ‘private’ are not separate spheres. Rather, the profit-motivation and the care and compassion motivations can be combined and pursued through the same organisation. This observation underlines an empathy with those who suffer and a desire to alleviate that suffering in a way that sits comfortably with the concept of compassion in organisational behaviour, a concept that is being developed in the field of positive organisation scholarship. The psychological and organisational concept of compassion focuses on being attuned to and responsive to the suffering of others. According to Jennifer George, compassion ‘reflects making decisions and behaving in ways that reflect care and concern for others’ (George, 2014: 7). She adds that ‘compassion is exhibited in organizations when organizational members express care and concern for others and are motivated to alleviate suffering’ (ibid). Compassion is oriented towards the other and nurtures emotional connection between an individual and their community, motivating that individual to alleviate others’ suffering. Compassion is ‘a relational process that involves noticing another person’s suffering, empathizing with that person’s pain, and behaving in some way to reduce that pain’ by caring for them (Moon et al, 2014: 52; Kanov et al, 2004). Compassion, through other-orientation and emotional connection with others, gives rise to thinking processes that might be regarded as necessary for undertaking successful social entrepreneurship. These processes include (1) increasing integrative thinking, (2) inducing pro-social judgments regarding the costs and benefits of social entrepreneurship, and (3) fostering commitment to alleviate others’ suffering. According to Miller et al, compassion contributes to an

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i­ndividual’s ability to process information in a more integrative fashion and in turn integrative thinking enables an individual to combine social and economic goals making social entrepreneurship possible. Economic and social value creation can be seen as mutually reinforcing rather than as mutually exclusive (Miller et al, 2012: 622–23 and 625). In addition, compassion is more likely to result in a more socially-oriented cost–benefit analysis that envisions a broader array of benefits than a rational cost–benefit analysis (ibid: 626). Madden et al suggest that ‘it seems likely that organizational capacity for compassion would heighten an organization’s awareness to human suffering and pain outside the organization as well’ (Madden et al, 2012: 704) and ‘we may see that organizations that value compassion are less likely to engage in purposely harming external stakeholder groups’ (ibid). This section has indicated the theoretical connections between the care ethic, organisational compassion and more socially responsible corporate behaviour. Through these theoretical connections, we can discover a dual corporate purpose that combines profit motivation with care and compassion motivation. How might a corporation achieve its dual purpose in practice? The next section ­identifies the organisational structural features that would be required for these combined goals to be achieved.

IV.  Structural Features Arising from Care and Compassion: How these Might Lead to More Positive Behaviour The above discussion leads us to look for an alternative entity that is less profitoriented and more collectivist and to seek the democratisation of institutions that constrain choices (Wylie, 1999: 37–38). Organisations that support a feminist ethic of care will have structural features necessary to enable them to be able to respond compassionately to different challenges. This feminist alternative to the masculine model would ‘undermine the chain of command, equalize the ­participants, subvert the monopoly on information and secrecy of decision-­ making, and essentially seek to democratize the organization’ (Bird and Brush, 2002: 46; Ferguson, 1984: 209) Control of the organisation would be shared, with more open systems, less distinct boundaries and with a diversity of voices (Bird and Brush, 2002: 48–49). This model presents a relational approach that replaces ranking with linking, enacts leadership as central in a web rather than at the top of the hierarchy, and advocates power-with and cooperation instead of power-over and competition and embraces collectivist decision-making, member empowerment, and a political agenda of ending [women’s] oppression (Bird and Brush, 2002: 46; citing Ferree and Martin, 1995).

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The key features of this feminist alternative model of corporation would include a flatter, web-like structure, decentralised decision-making with high ­participation of all employees regardless of their work role or position in the organisation; and strong connections with and amongst those that are affected by them ‘that promotes an ethic of shared responsibility and caring for one another’ (Cohen, 1994: 36). What is sought is an organisation which enables coordination of members ‘across multiple, diverse relational networks to provide access to different kinds of resources to those in need’ (Lawrence and Maitlis, 2012: 654). Bird and Brush refer to a form of spaghetti organisation in which everyone has several jobs and everyone belongs to one pool of resources (Bird and Brush, 2002: 52). Culturally, such an organisation would have ‘widely shared values of holistic personhood, family and expressed humanity’ (Lawrence and Maitlis, 2012: 654). A compassionate organisation is one in which members are valued beyond their formal roles and the organisational leaders demonstrate caring actions towards others and support members’ caring practices ‘with encouragement, time and organizational resources’ (ibid: 655). Givers and receivers would teach each other, and lend each other care and support over the long term (ibid). Bird and Brush present an example of Oticon A/S, a hearing aid business which went through a period of decline before being restructured. The firm undertook a process of de-­ specialisation, dropping departmental structure in favour of projects, creating a physical space that allowed flexibility as project teams disbanded and reformed, and using computers to rid the firm of most paper. Control over working hours was eradicated and employees could decide for themselves how long and when they would take vacations. This ‘spaghetti structure’ appeared as chaotic and disorderly but it worked. Oticon became a successful company employing 1,500 people and selling products in 100 countries worldwide (Bird and Brush, 2002: 52; Hagstrom, 1995). Madden et al identify ‘system conditions’ that contribute to organising for ­compassion. The first system condition is agent diversity. Diversity is key to creativity and adaptability with a greater likelihood that the system will contain agents with the ability to notice, feel and respond and more potential opportunities to organise for compassion (Madden et al, 2012: 695). This approach might encourage hiring practices that support a more diverse workforce made up of a variety of ethnic, racial, linguistic and physical abilities (Bird and Brush, 2002: 55). A second system condition is role interdependence that would generate behavioural and emotional familiarity among agents requiring them to be coordinated and thereby ‘Interdependence makes compassionate behaviour more likely because it generates behavioural and emotional familiarity among agents and requires coordination among agents.’ (Madden et al, 2012: 697). Agents then ‘are more likely to notice atypical behaviours, such as another’s suffering’ (ibid) and they ‘become more emotionally connected or attuned to each other’s needs’ (ibid). A third systemic condition is that of frequent and high quality ongoing social interactions in

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which people can express their emotions freely and that are generative and open to new ideas and influences (ibid: 698). If these conditions are present this may lead to a self-organised bottom-up process for compassion devised by the agents themselves (ibid). Social interactions signify communication. Indeed, communication, involving discussion and listening, is fundamental to the ethic of care and compassionate organisation (Butler, 2015: 24). Listening to the voices of those within the organisation or of those impacted by decisions and seeking to understand their positions and values should lead to better informed decisions (ibid: 116). Organisation members and stakeholders will share expertise through dual roles as teachers and learners simultaneously (Liedtka, 1996: 194), their dialogue will aim to enhance creativity and mutual personal growth (Liedtka, 1996) and different opinions will be recognised and built on in a constructive way. Wheeler advocates ‘an engagement process—not a simple unilateral decision or a ­selective consultation exercise—a genuine attempt at listening, rather than assuming what would be beneficial’ (Wheeler, 2002: 570). Drawing on Nancy Fraser’s work, Wheeler tells us that ‘there have to be adequate and fair forums in which needs can be articulated and interpreted. Otherwise the more rehearsed and organised are at an advantage’ (Wheeler, 2002: 571; Fraser, 1989: 164). These require hierarchies to be replaced with a more egalitarian approach so that the listening and discussion process becomes more discursive and participatory (Wheeler, 2002: 571). Wheeler proposes the use of care plans, the rationale of which is to make clear a corporation’s intervention strategy (ibid: 573). Wheeler’s care plan approach is reminiscent of many hospital practices which are, indeed, centred on care and the use of patient care plans. Multidisciplinary medical teams work together with patients and their families to create and work in accordance with individualised care plans. These practices require network structures in which participants, including the care givers and receivers, listen and learn from each other regularly to obtain the best possible outcomes. Where the process becomes over hierarchical and bureaucratised the outcomes become suboptimal. In the UK recently, there have been examples of successful and disastrous hospital practices which demonstrate the relevance of care and compassionate structures and behaviours. The Mid-Staffordshire Hospital Trust was severely criticised in an Inquiry (HC 375-1, 2010) following concerns about the hospital’s mortality rates and patient complaints. The Inquiry observed: —— There was a lack of basic care across a number of wards and departments at the Trust; —— The culture at the Trust was not conducive to providing good care for patients or providing a supportive working environment for staff; there was an atmosphere of fear of adverse repercussions; a high priority was placed on the achievement of targets; the consultant body largely dissociated itself from

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management; there was low morale amongst staff; there was a lack of openness and an acceptance of poor standards; Management thinking during the period under review was dominated by financial pressures and achieving Foundation Trust status, to the detriment of quality of care; There was a management failure to remedy the deficiencies in staff and governance that had existed for a long time, including an absence of effective clinical governance; Statistics and reports were preferred to patient experience data, with a focus on systems, not outcomes; There was a lack of internal and external transparency regarding the problems that existed at the Trust.

This damning report highlights a lack of care ethic organisationally as well as in hospital practices towards employees or to patients and carers. The organisation focused on systems, reports, targets and financial pressures, lack of openness, and lack of a supportive working environment. In contrast, two hospitals that have recently received outstanding status in the Care Quality Commission reports both demonstrate features that fit those identified as necessary for care and compassion. Birmingham Children’s Hospital, for example, was praised as follows: —— Learning was shared amongst the staff group to keep improving quality; —— Multidisciplinary team working was embedded in the trust; —— The feedback from parents and children was positive, with them reporting they were treated with respect and dignity. Bereaved parents described the compassionate care they received from the staff; —— There was enough nursing staff to meet patients’ needs supplemented by bank staff. Staffing sickness rates were below the England average; —— The trust had a strategy in place to ensure it met its vision; —— Staff were aware of the values and were assessed against them as part of the appraisal process; —— The leadership was well respected amongst the staff group and were effective; —— The culture was one of support of each other, staff referred to ‘Team BCH’, and using opportunities to listen to patients, carers and visitors (Care Quality Commission, 2017: 2). The CQC Report highlights several compassion and ethic of care features, including openness, responsiveness, a supportive environment with a clear vision and a culture of learning. A similar report was published for Newbridge House, a specialist eating disorders hospital for children and adolescents (Care Quality Commission, 2016: 2) The CQC stated that Newbridge House was outstanding because: —— Newbridge House was committed to research, innovation and public education in the field of eating disorders in children and young people. Its staff were

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Charlotte Villiers involved in local, national and international research projects. The company had invested heavily in developing learning material, tools and programmes to help the wider community learn about eating disorders in children and young people; The company invested in, and was responsive to the needs of, its staff. As a result, staff morale was good. Managers listened to staff and provided them with additional resources when they asked for them; Newbridge House was a comfortable, safe, modern and suitable facility for patients; Staff provided high quality treatment and care. Different professionals worked well together to assess and plan for the needs of patients. Patients had up-to-date care plans. These focused on treatment plans, recovery and rehabilitation; Staff ensured that patients and parents were fully engaged. Patients were involved in developing their care plans and staff gave them copies. The service routinely sought patient, parent and staff feedback. They made changes to reflect feedback; The service had a good relationship with their commissioners and was open to receiving challenge and suggestion; The service was well led and managers had good systems in place so they could audit the quality of care. The senior management team were accessible to their staff.

As with Birmingham Children’s Hospital, the Report for Newbridge House identifies features that are compatible with those of a compassionate organisation operating under an ethic of care. The hospital’s management is responsive to staff and to patients and parents, inviting their involvement and engagement. Clearly relationships matter, alongside a willingness to learn and improve. The examples of the Birmingham Children’s Hospital and Newbridge House indicate that caring does not have to be synonymous with the negative version of ‘charity’ and ‘doing good’ but not achieving anything. On the contrary, the caring and compassionate features highlighted in these examples are what contribute to their success and effectiveness in delivering their services. These examples also confirm that by incorporating caring into their organisational structures these entities have not merely embarked upon a journey of altruism but have ensured an integral form of well-being in which both the carers and the cared for are nurtured, and this is central to the effectiveness of the services performed. These examples also highlight the feminist position that it is necessary to focus both on the purpose or mission of the organisation and on developing the organisation as a democratic and communicative structure. The success of both hospitals was built on a combination of both features—they had developed a clear purpose and they had established good communication between management and staff and with patients and families. Social enterprises are a further organisational example connected to a principle of compassion. It has been noted that compassion provides a motivation for

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social entrepreneurs because it leads them towards a social mission rather than to focus solely on profit maximisation. Indeed, commitment to alleviating suffering is a trait among social entrepreneurs. Andre and Pache suggest that social entrepreneurs engage in entrepreneurial activities aimed at fulfilling a social mission ‘because they care about specific issues or specific people and because they feel like they have a responsibility to take care of them and to give care to them’ (Andre and Pache, 2016: 659). Miller et al build a model of three mechanisms (integrative thinking, prosocial cost–benefit analysis, and commitment to alleviating others’ suffering) that transform compassion into social entrepreneurship (Miller et al, 2012: 616). Thus some of the social enterprises referred to in this book may provide further lessons on effective organisation for compassionate purposes. In summary, Liedtka notes that ‘traditional structural categories, like function and hierarchy, can impede, rather than facilitate, success’ (Liedtka, 1996: 190) What is required is an infrastructure that encourages ‘coordination and cooperation across units and companies, that support, link, and create processes’ (Liedtka, 1996: 190). As Liedtka tells us: ‘the most successful organizations of the future will be flatter, quicker, and more intelligent at every level … and they will be collaborative enterprises which value the diversity of their workforce, and who work in partnership with their suppliers and in the communities in which they reside’ (ibid: 191) and ‘employees, customers, and suppliers would be treated as ends in themselves, and not merely means’ (ibid).

V.  Implications for Company Law and Corporate Governance If we were to pursue these more relational and compassion-oriented organisations more widely and with greater influence important changes to our company laws and corporate governance codes would be required. For example, the legal and regulatory framework should not emphasise the relationship between shareholders and managers whilst ignoring the relations of these parties with other key ­participants in corporate activities. Statutory directors’ duties might be amended to cover more strongly these relationships. For example, section 172 of the Companies Act 2006 requires directors to promote the company’s success for the benefit of the members and ‘in doing so have regard to’ the other matters such as employees’ interests and the need to foster the company’s business relationships with suppliers, customers and others, as well as the impact of the company’s operations on the community and the environment. Perhaps section 172 could be reworded to suggest that directors have a duty to manage the company in a way that respects and balances all stakeholders’ needs. Whilst the shareholders effectively sit at the top of the hierarchical order within traditional companies, because they exercise power through the subtle influence of capital, they do not have any duties in company law (Andrews, 2011).

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Rather, they enjoy power without responsibility. A regulatory approach supportive of the compassionate organisation would require that all those involved with or affected by the organisation’s activities would share ownership: they would share in the gains made and they would share responsibility with regard to the business activities. If the structure should retain a shareholder focus then this would also require a mechanism to increase their practical involvement, together with legal culpability, for any shareholders who do not participate in decisions about the use of their assets (Cohen, 1994: 24). Shareholders would have a right to hold officers and directors accountable under a new social responsibility standard (ibid: 35). Directors would be required to prioritise social responsibility rather than act solely as trustees of shareholder property (ibid). The company law would require that relevant organisations include mechanisms for full participation in the business strategies of all stakeholder groups or their representatives. Under such structures, transparency should go beyond annual reports or integrated reports that try to draw links between doing good and profits. Instead, information should be useful and relevant to all stakeholders and delivered in the places they need it. Accountability should be mutual between stakeholders to each other. Distributional inequalities between top managers and workers would be considered repugnant to a compassionate organisation because they are incompatible with the goal of maintaining equal social relationships (Neron, 2015: 181). Indeed, in this respect Neron refers to Feinberg who sees as abhorrent the distribution of wages, profits and salaries to whole classes of people as symbols of the recognition of superior talent because, ‘to say better people deserve better things is wholly inconsistent with democratic and liberal ideas’ (Neron, 2015: 180; Feinberg, 1970: 91) Moreover, Neron refers to Mintzberg who asks ‘should any company even try to attribute success to one person? A robust enterprise is not a collection of human resources; it’s a community of human beings’ (Neron, 2015: 180; Mintzberg, 2012). A major potential positive consequence of adopting a feminist approach is that it allows for, even encourages, greater diversity of organisational forms and enterprises. Indeed, another possible structural form with promise as a model of compassionate organisation is the cooperative. The principal benefit of the cooperative structure over the corporate structure is its horizontally shared decisionmaking capacity: it gives its members more rights than corporate shareholders. Cooperatives are described as membership-based entrepreneurial organisations that are characterised by democratic and inclusive governance (Sabatini et al, 2012: 4; Birchall, 2010; Borzaga and Tortia, 2010) and ‘equality in membership rights also implies that the governance of the organization is built over an underlying horizontal structure in which decision making power is evenly distributed across members’ (Sabatini et al, 2015: 4). These horizontal structures provide a basis for ‘inclusive organizational routines’ (ibid: 5). For example, members each enjoy equal say in the cooperative (Wylie, 1999: 38). Indeed, by owning their cooperative, workers are directly involved in the collective decisions and business practices, making them more closely connected to what is happening (ibid: 40).

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Cohen suggests that ‘levelling the hierarchical structure of the corporation might give workers a greater sense that their participation is valued in many areas’ (Cohen, 1994: 30) and, importantly, all members share equally in the profits, avoiding the problem of unequal rewards (Wylie, 1999: 40). The Mondragón Corporation is probably the most well-known federation of worker cooperatives located in the Basque region of Spain. Its stated corporate values are co-operation, participation, social responsibility and innovation, and it operates in accordance with 10 principles: Open Admission, Democratic Organisation, the Sovereignty of Labour, Instrumental and Subordinate Nature of Capital, Participatory Management, Payment Solidarity, Inter-cooperation, Social Transformation, Universality and Education. The Mondragón Corporation has been highly successful and hires approximately 75,000 employees. Sabatini, Modena and Tortia conclude that the horizontal structure of cooperatives, that are not purely focused on profit maximisation, could foster the development of social trust (Sabatini et al, 2015: 17).

VI.  Challenges and Potential Pitfalls There are of course, likely to be many challenges in pursuing an ethic of care, relational or compassionate business framework. These challenges may be conceptual, political or practical. Conceptually, it is necessary to develop the feminist theories further and to provide greater clarity on the detail of these caring and compassionate organisations. Some difficulties are identified by Bird and Brush who note that feminist ventures might entail less focused or more diffuse concepts of venturing, marketing and organising. The founder’s reasons for venturing may be perceived as less than rational, strategic or thought-through and this could lead participants to feel confused or ambivalent. The venture could be used to preserve relationships that stand in the way of the organisation’s success. The feminist venture may be more responsive to others but with less self-control. Whilst stronger alliances and cooperative and open, non-secretive arrangements are possible, some processes might be cumbersome and appear to lack direction (Bird and Brush, 2002: 48). The feminist care approach faces numerous political challenges, not least that of how to persuade decision-makers and those in power to take the suggestions on board and use these as bases for developing their policies. A fundamental political challenge is to tackle the capitalist hegemony. Caring and relational feminism suggest cooperation, but under capitalism, the corporation’s goal of profit maximisation is a competitive, rather than a cooperative enterprise. Therefore, capitalism itself needs to be challenged (Wylie, 1999: 14). Taking account of the patriarchal and hierarchical structures, socialist feminism ‘regarding both gender and class relations as interwoven’ is ‘concerned with the effects of corporations on all of society’ (ibid: 10). Thus, ‘just as important a barrier to equality is the capitalist means of production and all it entails’ (ibid). Socialist feminism concerns

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itself, alongside other feminist theories, with the fragmentation inherent in the corporate law structure. Yet it differentiates itself from other feminisms by ­suggesting that the fragmentation is not between directors and shareholders, who are unified by a common pursuit of increased profits, but instead, between the dominant and privileged elite and workers and between women of different social classes (ibid: 18). Thus, ‘women of the ruling class will make decisions pursuant to their economic, as well as gender, interests’ (ibid: 26). Working class women are most disadvantaged as they are placed at the bottom of the power hierarchy (ibid: 27). Tronto observes the danger of the power dimensions that might arise in care interactions (Tronto, 1995: 145). It becomes necessary then to avoid misapplication of care as a way of abusing power and giving rise to paternalism. Care and compassion should not be paternalistic but empowering. Rather than foster dependence, ‘to care means to respect the other’s autonomy and to work to enhance the cared-for’s ability to make his or her choices well’ (Liedtka, 1996: 184). Liedtka tells us that we must ensure that ‘the process evolves out of the aspirations and capabilities of the cared for, rather than being driven by the needs and goals of the care-giver’ (ibid, 185). Similarly, compassion should not be an excuse for employee discipline given the existence of power relations at work (Simpson et al, 2014: 348). As Simpson et al remind us: [C]ompassion is consequently generally represented as the prerogative of the powerful giver (organizational manager) who may or may not choose to be compassionate to a subordinate receiver (employee). In this portrayal, the power of the receiver is not considered nor is the legitimacy of the giver’ (ibid: 354).

In addition, ‘the subjectivity of the giver is privileged over the experience of the receiver.’ A care agenda should be ‘a recognition that inequalities do exist and can be addressed through notions of meeting needs through care’ (Wheeler, 2002: 573). There are some practical challenges that would also need to be addressed including developing actual governance models. Cooperatives and ‘spaghetti structures’ offer a starting point but more work needs to be done on presenting clearly the possible structures and governance mechanisms. Additionally, there may be a need to scale up from smaller to larger sized organisations. Andre and Pache anticipate that as they go to scale social entrepreneurs run the risk of caring about resource providers (customers, donors, partners etc) more than about beneficiaries, and as the organisations grow they are likely to rationalise, homogenise and coordinate to optimise resources and to provide similar levels of quality across the organisation, losing the core features of care-oriented arrangements. The suggested solutions are to create a form of relational bureaucracy which promotes universalistic norms of caring for particular others through the development of reciprocal relationships between managers, workers and clients. Thus, Andre and Pache recommend that to instil organisational care within their ventures, social entrepreneurs should rely on three key organisational principles: fostering care in all organisational members and the directors’ and top executives’ involvement to cultivate their care, lead

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by example and demonstrate to others that caring is important and to develop their own legitimacy as leaders; encouraging caring relationships among organisational members; and developing an organisation’s capacity to listen to the different voices of their internal and external stakeholders in a systematic way (Andre and Pache, 2016: 668). The Mondragón Principles noted above might provide an example to assist in scaling up, and the management practices demonstrated in the Birmingham Children’s Hospital and Newbridge House hospital, and identified in the Care Quality Commission Reports, could provide positive models. Technology presents a further challenge. Technology has the capacity to be a force for good and to create more leisure time for many (Mason, 2015) but it could also be used as a form of domination or power over other people, not least by threatening massive job losses. Some writers speak of a ‘robot apocalypse’ that amplifies economic disparities if the robots are owned by a wealthy elite who ­benefit exclusively from the income that flows from them (see Tarnoff, 2017; Ford, 2015). Indeed, some commentators observe mechanisation as a form of masculinisation and continued male domination. Thus, technology could reinforce existing social inequalities, rather than eradicate them (Cohen, 1994: 32; Wajcman, 1991). In this way, Acker notes the danger that ‘the pleasures of technology become harnessed to domination, and passion becomes directed toward power over nature, the machine, and other people, particularly women, in the work hierarchy’ (Acker, 1990: 153). This technological challenge is a warning that compassionate organisation will require coordination beyond each individual entity and reminds us that some challenges are broader and politically relevant.

VII. Conclusion In this chapter, I have used feminist literature and positive organisation scholarship to present an argument in favour of adopting a culture of care and compassion in the corporate governance framework as a more promising approach to pursuing corporate responsibility. The prevalence of hierarchical corporate structures and a corporate governance system that gives precedence to shareholder wealth does not provide a context favourable to socially responsible corporate behaviour. The pursuit of profit maximisation does little to encourage corporate benevolence. A compassionate approach, however, is more likely to inspire the corporate actors to seek to alleviate other people’s suffering and to form long-term caring ­relationships. As Wheeler suggests, an ethic of care ‘has as its dominant values reciprocity, equality, trust, respect for difference, and the promotion of self-respect’ (Wheeler, 2002). In addition, she argues that a positive ethical environment results in greater job satisfaction and lower turnover (Wheeler, 2002: 575; Ambrose et al, 2008: 329). From a feminist perspective, the aim is for gender maturity which involves the balancing of rights and laws with care and compassion and integrates, accepts and

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appreciates the qualities of men and women (Bird and Brush, 2002: 56). Socialist feminists and compassion advocates would extend care and compassion beyond gender to all participants inside and outside the corporation. Further research on cooperatives, growing social enterprises and recipients of care and compassion is needed to investigate if this suggested approach to corporate organisation and governance is realisable. Such research would also need to address questions including how might we import compassion into already existing large hierarchical organisations? How might we move the established corporate governance system in this direction? Ultimately, the aim is for radical transformation through care and compassion. Acker provides us with an enticing vision of why we should pursue this goal: The rhythm and timing of work would be adapted to the rhythms of life outside of work. Caring work would be just as important and well rewarded as any other; having a baby or taking care of a sick mother would be as valued as making an automobile or designing computer software. Hierarchy would be abolished, and workers would run things themselves. Of course, women and men would share equally in different kinds of work. Perhaps there would be some communal or collective form of organization where work and intimate relations are closely related, children learn in places close to working adults, and workmates, lovers and friends are all part of the same group (Acker, 1990: 155).

References Acker, J (1990) ‘Hierarchies, Jobs, Bodies: A Theory of Gendered Organizations’ 4(2) Gender and Society 139–58. Ambrose, ML et al (2008) ‘Individual Moral Development and Ethical Climate: The Influence of Person-Organization Fit on Job Attitudes’ 77 Journal of ­Business Ethics 323. Andre, K and Pache, AC (2016) ‘From Caring Entrepreneur to Caring Enterprise: Addressing the Ethical Challenges of Scaling up Social Enterprises’ 133 Journal of Business Ethics 659–75. Andrews, P (2011) ‘Re-thinking Business Structures—How to Encourage Sustainability through Conscious Design Choices’ in R Douthwaite and G Fallon G (eds), Fleeing Vesuvius—Overcoming the Risks of Economic and Environmental Collapse (New Society Publishers) available at www.fleeingvesuvius.org. Anti CSR, http://anticsr.com/csr-examples/. BBC News (2015) ‘Volkswagen: The scandal explained’ www.bbc.co.uk/news/ business-34324772 (10 December 2015). Birchall, J (2010) People-centred Businesses: Co-ooperatives, Mutuals and the Idea of Membership (Basingstoke, Palgrave Macmillan). Bird, B, and Brush, C (2002) ‘A Gendered Perspective on Organizational Creation’ 26(3) Entrepreneurship Theory and Practice 41–66.

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9 Beyond Shareholder Primacy— The Case for Workers’ Voice in Corporate Governance JANET WILLIAMSON

I.  Directors’ Duties and the Voice of Shareholders in Corporate Governance Shareholders are at the heart of the UK’s corporate governance system. They elect company directors, annually, at company annual general meetings (AGMs). They have had an advisory vote on remuneration reports since 2003 and a binding vote on remuneration policy since 2014. They can table resolutions and vote at company AGMs and call extraordinary general meetings (EGMs). In contrast to the rest of Europe, where workers’ participation in corporate governance is taken for granted in most countries, in the UK no group other than shareholders holds any significant rights in relation to corporate governance. The central role of shareholders in corporate governance is neither an accident nor an historical anachronism. Public policy over the last 25 years has emphasised accountability to shareholders, rather than regulation, as the means of improving corporate practice. The corporate governance reviews of the 1990s—led by the Cadbury, Greenbury and Hampel committees—all recommended reforms that relied on shareholders monitoring and engaging with companies, alongside increased company disclosure. Regulation since then has further bolstered the role of shareholders. Successive governments have chosen to delegate core aspects of corporate governance to shareholders, relying on a mixture of strengthened shareholder rights and transparency, rather than regulating directly. For example, both the previous Labour government and the Coalition government chose to address executive pay through reporting requirements combined with strengthening shareholder voting rights. At the time of writing, the UK government is considering responses to its Green Paper on Corporate Governance Reform (DBEIS, 2016) issued in November 2016, which included a variety of proposals that would strengthen shareholder rights in relation to executive remuneration still further.

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However, perhaps the greatest privilege pertaining to shareholders is the requirement under company law that directors should promote the success of the company for the benefit of its members—which in legal terms means its shareholders. Directors are required to take account of wider stakeholder interests in achieving this, but nonetheless under company law the interests of shareholders trump those of other stakeholders. Directors’ duties were codified for the first time in the Companies Act 2006, following the recommendations of the Company Law Review (CLR), set up by the then Labour Government in 1998 to undertake a fundamental review of company law. The CLR examined the questions of company purpose and in whose interests companies should be run, noting that ‘we interpret our terms of reference as requiring us to propose reforms which promote a competitive economy by facilitating the operations of companies so as to maximise wealth and welfare as a whole’ (Company Law Steering Group, 1999: 9). Following consultation, the CLR recommended what it called ‘enlightened shareholder value’ (ibid). This left serving shareholder interests as the primary aim of directors, but required them to take into account the interests of employees; customer, supplier and community relationships; and the impact of their decisions on company reputation, the environment and the long-term. These wider considerations, however, are subject to the overall aim of serving shareholder interests, and ‘enlightened shareholder value’ thus basically left the UK’s shareholder-oriented corporate governance model intact (see further, Tsagas, herein, chapter 7). The TUC has for many years had concerns about the reliance on shareholders in corporate governance and opposes shareholder primacy as a matter of principle. But over recent years changes in share ownership and investor practices have made the existing system increasingly dysfunctional even in its own terms to the extent that they now present a serious challenge to the reliance on shareholders within the UK’s corporate governance system. In the 1960s, the majority of shares in UK companies were held by individuals, many of whom took a reasonable level of interest in the companies whose shares they owned. By the late 1980s, the majority of shares were owned by UK institutional investors such as pension funds and insurance companies, who were expected to take a long-term approach to share ownership and who tended to hold a significant proportion of their assets in UK equities. The reforms of the corporate governance reviews of the 1990s and the Company Law Review were predicated upon this pattern of share ownership. Today the situation has changed again. The most recent figures show that UK pension funds and insurance companies now hold three and six per cent of UK equities respectively, the lowest percentages since the survey started over 50 years ago. While individuals hold 12 per cent, over half—54 per cent—are owned by investors from outside the UK (Office of National Statistics, 2015). It will naturally be harder for overseas investors to develop the kind of engaged relationships envisaged by the UK’s corporate governance system. Language, proximity, culture and availability of information all make engagement much more

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straightforward within a national context in comparison with engaging with companies abroad. But there are also democratic implications, as the dominance of overseas shareholders reduces the extent to which national societal expectations, for example on executive pay or fair pay for the workforce, will affect companies via their shareholders. However, engagement between UK investors and companies is also no panacea. In contrast to individuals, who tend to hold shares in a limited number of companies in which they take a strong interest, institutional investors generally hold highly diversified portfolios. For fund management firms (which are generally used by all but the very largest pension funds to manage their investments) and insurance companies, the sheer number of companies whose shares they hold poses a severe practical obstacle to the quality and quantity of engagement that is possible. Those investing in index or tracker funds are likely to hold the FTSE All Share Index, which comprises over 600 companies, or the FTSE 350 Share Index, and many fund management firms will also hold extensive overseas equity investments. This means that the total equity holdings of a large active fund manager is likely to be in at least in the hundreds and for a passive manager in the thousands. The TUC’s Fund Manager Voting Survey has asked respondents about the size of their corporate governance and responsible investment teams over many years and, worryingly, the trend has been downwards. According to the most recent Survey information (TUC, 2013), the vast majority have teams of less than 10 people and all but two have teams of less than 20. However skilled such people may be, it will not be possible for them to engage effectively with all the companies their funds invest in across the range of issues for which shareholders are ultimately responsible. The other side of this coin is that the shareholders of a large listed company generally run to several hundred, which does not aid companies trying to engage their shareholders in discussion of future strategy. These twin issues of diversification and fragmentation were recognised by Professor John Kay in his review of equity markets (commissioned in 2011 by then Secretary of State for Business, Innovation and Skills Vince Cable—The Kay Review, 2012). One of the Review’s recommendations was that fund managers should hold smaller portfolios of shares. However, there is no indication that this is likely to come about, given that the importance placed on diversifying risk continues to exert a strong pressure for diversified shareholdings. There is, however, a yet more fundamental problem. The current system of shareholder primacy can only be justified if it is assumed that the interests of shareholders converge with the long-term interests of the company. Otherwise, the priority given to shareholder interests would simply be a form of value extraction, or rent extraction in economic terms. The increasing reliance of shareholders on share trading to generate investment gains changes the nature of shareholder interests (see also, Ireland, herein, chapter 1). In the case of a long-term shareholder, whose main interest in a company is receiving a dividend over a period of time, there should be a reasonable

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convergence of interests between the shareholder and other company stakeholders and, critically, the company itself. It is clear from the reports of the Company Law Review that the ‘enlightened shareholder value’ approach was based on the belief that there will generally be a convergence of interests between shareholders and other company stakeholders: ‘The proposed statement of directors’ duties requires directors to act in the collective best interests of shareholders, but recognises that this can only be achieved by taking due account of wider interests’ (emphasis added) (Company Law Steering Group, 2000: 15). The interests of a share trader, however, will be in selling their shares for more money than they bought them for. And their interest therefore lies in short-term strategies to raise the share price, regardless of the impact on long-term, organic growth. This means that in many cases, share traders’ interests may be opposed not only to those of other company stakeholders but crucially to the long-term success of the company. The prevalence of share trading knocks a large hole in the rationale for the role of shareholders in corporate governance. The interests of share traders cannot be taken as a proxy for the long-term interests of the company or other company stakeholders. In this scenario, it does not makes sense that shareholders should have such extensive rights in relation to companies, nor that shareholders should be the group whose interests company directors are required to promote. This problem of the divergence of interests is particularly stark in relation to mergers and takeovers. Despite some useful reforms to the Takeover Code (see Code Committee of the Takeover Panel Response Statement, 2011) following the Kraft-Cadbury takeover in 2010, whether or not a takeover proposal will go ahead is ultimately down to the shareholders, and the shareholders alone, of the target company. The directors are required to set out their opinion of the bid, but they can neither prevent nor force a takeover to go ahead against the will of the shareholders. Yet in many instances the decision of shareholders whether or not to accept a merger offer will depend primarily on the price they are offered for their shares, which may have little or nothing to do with whether the merger or takeover actually makes good economic sense in terms of productive capacity or wider interests. And the threat of hostile takeover can encourage company directors to prioritise dividends over investment to keep their share price high in order to protect themselves from an unwanted bid, even where such payments are not justified by company performance. A recent survey of over 1,200 firms, published by the Bank of England, found that the most important reason for under-investment was a constraint on using profits for investment purposes, with three quarters of firms rating distribution to shareholders (including dividends and share buybacks) and purchase of ­financial assets (including mergers and acquisitions) ahead of investment as the most important use of internally generated funds. Strikingly, 80 per cent of publicly owned firms agreed that financial market pressures for short-term returns to shareholders had been an obstacle to investment (Cunliffe, 2017). This ­demonstrates how

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the role of shareholders in the UK’s corporate governance system contributes to under-investment and short-termism. To address shareholder primacy, the TUC proposes that directors’ duties should be reformulated so that company directors are required to promote the long-term success of the company as their primary aim. Through the long-term success of the company, the interests of other key stakeholders, including workers and longterm shareholders, would also be served. Directors should be required to have regard to the interests of shareholders, alongside those of workers and the other stakeholder groups already included in section 172 of the Companies Act. The current wording of section 172 of the Companies Act is set out below, followed by the TUC’s suggested rewording, which is based on the existing wording of section 172 with minor amendments. Section 172 Duty to promote the success of the company: (1) A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to— (a) the likely consequences of any decision in the long term, (b) the interests of the company’s employees, (c) the need to foster the company’s business relationships with suppliers, customers and others, (d) the impact of the company’s operations on the community and the environment …

TUC proposal: A director of a company must act in the way s/he considers, in good faith, would be most likely to promote the long-term success of the company, and in so doing, should have regard to the need to: i. deliver sustainable returns to investors ii. promote the interests of the company’s workforce iii. foster the company’s relationships with suppliers, customers, local communities and others, and iv. take a responsible approach to the impact of the company’s operations on human rights and on the environment.

As well as removing shareholder primacy, this also makes it explicit that directors should pursue strategies for long-term company success. In the current formulation, directors are only required to ‘have regard … to the likely consequences of any decision in the long term’, which is too weak, and does not put the long-term success of the company at the heart of what directors are required to do. The TUC believes that this reformulation of directors’ duties would best serve the overall public interest and deliver the Company Law Review’s original aim that company law should ‘facilitat[e] the operations of companies so as to maximise wealth and welfare as a whole’ (Company Law Steering Group, 1999: 9). There are different ways in which this reformulation of directors’ duties could make a practical difference. The Corporate Governance Code, which is widely

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adhered to by listed companies, should be amended to reflect the revised directors’ duties and the rules on mergers and takeovers should be reviewed in the light of the changes. Trade unions and other groups representing stakeholder groups affected by and contributing to company performance would be able to highlight the revised duties in their dealings with companies. In addition, the TUC believes that a standing Corporate Governance Commission, with responsibility for reviewing and monitoring corporate governance policies and practice, should be established. As well as promoting high standards of corporate governance, the Corporate Governance Commission should have powers to hold directors to account for non-compliance with Section 172 and the other parts of directors’ duties. At present, directors’ duties can only be enforced through derivative actions by minority shareholders, and such cases are very rare, while those stakeholders whose interests should be protected through Section 172 have no route through which to enforce their legal rights. Such a body could either be a re-constituted version of the Financial Reporting Council (FRC), or a new body that would take on some of the FRC’s existing functions, combined with new ones. At the heart of its role would be the duties of directors as set out in section 172 and safeguarding the contribution of business as a whole to the public interest. It would be essential that stakeholder groups were represented on such a body, so that those affected by companies and contributing to company success could participate in its discussions. Ofcom and the Competition and Markets Authority provide examples of existing organisations that undertake statutory regulatory functions while operating at arms-length from government. Addressing the role of short-term shareholders in corporate governance would require reform of directors’ duties to be combined with other measures. While encouraging long-term shareholding is a worthwhile aim, bringing this about would be a difficult and complex task. At the present time, there is a lack of credible proposals, let alone a consensus, on how this could best be achieved. The proposals advocated by John Kay in his review of equity markets (The Kay Review, 2012) do not seem as yet to have had any impact on patterns of shareholding. Rather than trying to lengthen shareholding periods, an alternative approach is to reduce the power of short-term shareholders in corporate governance. The TUC proposes that shareholders’ corporate governance rights to voting and engagement should be subject to a minimum period of share ownership of at least two years. This would leave the economic rights of short-term shareholders to receive dividends intact, but would remove their corporate governance rights, thus reducing their influence on company decision-making. A variation of this proposal is in place in France and Italy, which allow double or multiple voting rights for shareholders with at least two years’ shareholding. While the practice is not illegal in the UK, it would require a change in the listing rules, as companies are not permitted to have a Premium listing for shares that do not confer full voting rights (OECD, 2017).

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II.  The Case for Workers’ Voice in Corporate Governance Alongside addressing the primacy of shareholders, the TUC believes that there are strong arguments for strengthening the voice of workers in the UK’s corporate governance system. Indeed, many of the arguments used to justify the role of shareholders in corporate governance actually apply more aptly and accurately to the role of workers. The priority given to shareholders in relation to corporate governance is sometimes justified by the assertion that shareholders hold the greatest (or ‘residual’) risk in relation to companies. But this argument is contradicted by reality, in which institutional investors hold highly diversified portfolios precisely to spread their risk. In contrast, few workers can simply leave one job and walk into another. Workers invest their labour, time, skills and commitment in the company they work for, and cannot easily diversify this risk. If this investment goes wrong, workers and their families pay a heavy price—the loss of employment and loss of income, skills, confidence and health that this can bring. If carrying risk gives rise to rights to representation and the protection of interests, this creates a strong case for workers’ representation within corporate governance. While shareholder primacy has been justified by the mistaken argument that shareholder interests converge with those of the company, it is rather the interests of company workers that are most closely aligned with those of the company. As union representatives are acutely aware, company success is a prerequisite for good quality employment prospects. Indeed, of all company stakeholders, it is the interests of workers that correlate best with long-term company success. At the same time, positive employment relationships make a significant contribution towards company performance—this is common sense but also backed up by extensive research (McLeod and Clarke, 2009). It is very clear that developing positive, long-term employment relationships based on respect and trust makes good business sense for any company (see also Erdal, herein, chapter 11). This mutuality of interest is demonstrated by the numerous examples of unions working with employers to develop strategies to foster company success, both in good times and bad. For example, during the recession that followed the financial crisis, unions and employers worked together to put in place plans that preserved jobs while keeping struggling businesses afloat, agreeing changes to working ­arrangements such as short-hours working at companies including Jaguar Land Rover, Ford, Vauxhall and BMW among others. This same spirit of collaboration has also contributed to innovation and competitiveness in the motor industry, as noted by Professor David Bailey from Aston Business School: I would also add in another factor for the [motor] industry’s success—the flexibility and hard work of workers and unions in pulling out all the stops to help make the UK

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a c­ ompetitive place in which to assemble cars and source components (something the media all too often fails to recognise) (Bailey, 2015).

There are also strong democratic arguments for workers’ voice within corporate governance. It is an important principle of democracy that those affected by decisions should have some say in making them. However, on entering the workplace this basic tenet of democracy is left at the door. Despite the fact that those in employment spend a very significant proportion of their waking hours at work, workers have no automatic right to influence the decisions that are taken there, decisions that have a major impact on their work and livelihoods. This amounts to a serious democratic deficit within our economic and political system. Workers’ interests are affected by the priorities and outcomes of company decision-making and it is a fundamental matter of justice that they should be represented within those discussions. These arguments of risk, interests and democracy make a strong case for strengthening workers’ voice in corporate governance. The TUC believes that this can best be done through the representation of workers on company boards. Our proposals for implementation include (see TUC, 2016): —— Worker directors should comprise one third of the board, with a minimum of two worker directors per board. —— Workers should have the right to board-level representation in all listed and private companies with 250 or more workers. This would cover approximately two fifths of the private sector workforce or half if businesses ‘with no employees’ are excluded (DBIS, 2015). —— In addition, there should be a right for workers in smaller companies of 100 or more workers to be able to trigger board representation rights through their unions or bodies established under statutory consultation procedures. —— Workers’ representation rights should apply to a unitary or two-tier board structure. —— Recognised trade unions plus representative bodies established under statutory consultation machinery should be able to nominate candidates for election. —— Nomination should also be open to workers who have been nominated by a specified number of workers. —— Election should be by the entire workforce, including overseas staff. —— Worker directors would share the same legal duties with other company directors and would therefore be responsible for bringing the perspective of a worker to the boardroom, rather than for directly representing all company workers. —— Worker directors should have the right to paid time-off for training. —— The TUC would organise a network for workers directors, and would work with unions and other organisations to offer appropriate training. The TUC believes that a legal requirement for worker board representation would serve the overall public interest. An important part of this is the

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c­ ontribution that worker directors can make to improving the quality of board decision-making. Workers’ interests depend on sustainable company success, so including workers on company boards could help boards to prioritise the long-term success of the company in decision-making, rather than being distracted by short-term financial engineering, as occurred for example in the financial sector in the run-up to the crash. Worker directors can clearly play a constructive role in encouraging the development of positive employment relationships, which is key to addressing the UK’s low productivity and on which company success depends. It is clear from countries where worker board representation is in place that other board members particularly value the ability to get a worker’s perspective on how possible board proposals are likely to be viewed by the company’s workforce. For example, a study about worker board participation in Ireland found that worker directors could help the board to anticipate the impact of decisions, including on industrial relations, an area where their contribution was seen as extremely positive (TASC, 2012).1 Workers also bring with them in-depth knowledge of how their company operates and are well placed to contribute to a range of strategic and operational discussions that are central to board decision-making. The ‘intimate operational knowledge’ of worker directors was particularly noted by respondents in the Irish study cited above (ibid), which concluded that worker directors were ‘loyal to the company, trustworthy and diligent in their duties; [and] their contribution was viewed as positive and unique by over three-quarters of respondents’. Their experience of working for the company is also likely to have given worker directors direct experience of other stakeholder relationships; indeed, a Danish study (Caspar Rose, 2005) found that worker board representatives were more likely than shareholder representatives to take broader stakeholder interests— including community relationships and environmental impacts—into account. And workers are also much more likely to understand how most members of the public view issues like executive pay and are well-placed to bring a dose of muchneeded common sense to remuneration committees, which would be good for the reputation of corporate Britain. There has been growing awareness in the UK of the benefits and importance of board diversity. The professional accountants body ACCA has noted how ‘groupthink’ can impede board decision-making and described how diversity in ‘skills, backgrounds and experiences’ can bring a greater range of perspectives to debate, changing boardroom dynamics and improving the quality of decisions (ACCA, Technical Articles). Following initiatives such as the 30% Club and the Davies Review (Women on Boards, Davies Review Five Year Update, 2015), considerable progress has been made in increasing the number and proportion of women on boards (albeit 1  Respondents were worker board representatives, other board members, company executives and independent experts.

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mainly through increasing the number of female non-executive directors rather than executive directors). More recently the Parker Review (Parker Review, 2016) has highlighted the need to increase the participation of people from black and minority ethnic (BME) backgrounds on boards. Little attention has to date been paid to the issue of socio-economic board diversity, despite evidence that socio-economic background can play a significant role in people’s life chances. Recent research published by the Social Mobility Commission (2017) found that people from working class backgrounds working in the professions earn on average £2,242 less than colleagues from more privileged backgrounds, even when they have the same education qualification, role and experience. As Theresa May noted in July 2016, ‘non-executive directors are drawn from the same narrow social and professional circles as the executive team’ (The ­Guardian, 2016). An important benefit of worker board representation is the diversity it would bring to company boards, bringing people with very different experiences, backgrounds and skills onto the board, and helping to challenge the problem of ‘groupthink’ noted by ACCA. In the Irish study quoted above over half the respondents mentioned ‘the importance of having a contrary voice on the board in conjunction with the need to avoid groupthink and promote diversity’ (TASC, 2012: 29). While worker representation on company boards would be a big step in the UK, it is important to remember that in much of Continental Europe it is an established and valued aspect of how companies operate. It is sometimes thought in the UK that workers on boards is a uniquely German phenomenon, but in reality 13 out of the 28 EU Members States plus Norway (ie, 13 out of 29) have significant rights for workers to be represented on company boards. Notably, worker board representation is in place in many of Europe’s most successful economies, including Germany, France, Sweden, Denmark, the Netherlands and Luxembourg. In addition, there are six more countries in which workers have more limited rights. It is countries like the UK with no mechanisms for workers’ voice in companies that are in the minority and out of step with the rest of Europe. The prevalence of workers’ representation on company boards across Europe provides an evidence base from which we can learn in considering why and how to implement worker board representation in the UK. A study (Gold et al, 2010) based on interviews with worker board representatives in 13 European countries presents a picture of worker representatives making a genuine difference to the way in which decisions are made, with their role contributing to ‘the formation of a more balanced corporate strategy’ (Gold, 2011): SS Examples of their influence include cases where the worker representatives had recognised the risks of a merger strategy and had combined with some of the shareholder representatives to defeat the proposal; the rejection of plans for a new office block on grounds of cost; and a situation where a worker representative had argued against plans for outsourcing using arguments about exchange

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rates and other market factors that turned out to be right and convinced shareholder board representatives to reject the plans. The study shows that the influence of worker board representatives is based both on their role as a member of a key stakeholder group with in-depth knowledge of the day to day workings of their company and also on a sophisticated knowledge and understanding of the markets in which their company operates and the economic challenges it faces. It also demonstrates that workers do not operate as lone adversarial voices, but often in partnership with others on the board in raising issues of shared interest or concern. The value placed by other board members on the role of worker board representatives is well documented. For example, a survey of Swedish CEOs, company chairpersons and employee board representatives found that 60 per cent of Swedish ‘enterprises’ considered the role of worker board representatives at their company positive or very positive, while just seven per cent considered it negative and none considered it very negative. Over three quarters (76 per cent) of CEOs described the level of trust between them and the employee representatives as high or fairly high, while the corresponding figure for the employee representatives was 74 per cent. In addition, 81 per cent of CEOs described the co-operation between the employee representatives and other board members as good, with just four per cent describing it as bad (Wallenberg and Levinson, 2012). Worker board representation is associated with both economic and social benefits. Table 1 shows that countries with stronger workers’ participation rights— meaning widespread rights and practices for board representation, workplace representation and collective bargaining—do better in terms of their employment rate (broken down by age and gender), expenditure on Research and Development (R&D), and the risk among the population of poverty or exclusion (ETUI, 2016). While correlation does not prove causation, this is surely worthy of consideration by policy makers and all those with an interest in the economic and social performance of the UK. Table 1:  Comparative performance of countries with stronger rights versus weaker worker participation rights on five Europe 2020 headline indicators (2009–14) Europe 2020 headline indicator All data is 2009–14

Group 1: countries with stronger participation rights

Group 2: countries with weaker participation rights

Difference (group 1 vs group 2)

Employment rate, age group 20–64

72.0%

66.1%

5.9%

Gross domestic expenditure on R&D (GERD)

2.2%

1.1%

1.1% (continued)

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Table 1: (Continued) Europe 2020 headline indicator All data is 2009–14

Group 1: countries with stronger participation rights

Group 2: countries with weaker participation rights

Difference (group 1 vs group 2)

Share of renewables in gross final energy consumption

18.6%

14.1%

4.5%

Early leavers from education and training

9.4%

13.2%

3.7%

Tertiary educational attainment, age group 30–34

38.8%

35.4%

3.4%

Population at risk of poverty or exclusion

18.7%

29.8%

11.1%

There is considerable diversity in how workers’ participation on boards operates across different European countries, with variations in how workers are nominated and elected; who is eligible to become a worker director; the proportion or number of worker directors per board; and which companies are covered by requirements on workers’ board participation (Conchon, 2015). Importantly, it does not require a two-tier or supervisory board system. In some countries, including the well-known example of Germany, worker representatives sit alongside shareholder representatives on a supervisory board. But in other countries, such as Sweden, Norway and Ireland, workers are represented on a unitary board, as exists in the UK. There are also a growing number of countries where companies can choose between a unitary and a two-tier board, and in these cases workers’ participation rights generally apply regardless of which option the company adopts. This is not something that lends itself to a ‘one size fits all’ approach, and while there is much that we can learn from our European neighbours, the TUC does not advocate that any one of these existing systems is simply imported wholesale into the UK. There may nonetheless be elements from particular systems that could work well here, and it would be entirely possible to combine elements from different existing systems with new provisions to create a framework that was uniquely suited to the UK. This is the aim of the TUC’s proposals for how worker representation on boards could work in the UK set out very briefly above. While rare, worker board representation does exist in the UK. FirstGroup, a successful FTSE 250 transport company, has had an employee director since the company’s inception in 1989. Each division at FirstGroup elects their own employee director, and this group elects the employee director for the main board from their ranks. The company recognises trade unions as well as having a worker director on the board.

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A FirstGroup spokesperson said (TUC, 2016): We are proud of our long history in bringing the voice of our workforce into the ­boardroom through our Employee Directors. In our experience, the perspectives and input of Employee Directors aids decision making and demonstrates the company’s desire to hear from our workforce. It complements the strong and positive relationship we have with trade unions, rather than being a substitute for normal industrial relations. Directors and workers alike find Employee Directors invaluable in providing a closer link between the depot and the boardroom.

Mick Barker, former FirstGroup Employee Director, said: I serve as a bridge from the front line to board. In board meetings I have the same voice and voting rights as other directors; I’m invited to speak on any subject and I get just as involved as anyone else. But I spend most of my time at ground level, not the boardroom. I help spread information to ensure people in the mess rooms and depots understand what’s going on at board level and why decisions are being made—and so the board get a first-class understanding of what’s going on at the frontline … employee directors provide a good complement to the work of unions and their reps—but we are never a substitute.

And there are other precedents for workers playing this kind of role in the UK. In trust-based pension schemes, members have the right to nominate one third of the trustee board. These member-nominated trustees are chosen by and from scheme members—ie, ordinary workers—and have to get to grips with large amounts of complex, financial and technical information. They have to work with the employer-nominated trustees, with whom they share the same fiduciary duties to act in the best interests of scheme members. The importance of their role in running pension schemes has been widely recognised by scheme members, employers and pensions specialists alike (see eg The Pension Regulator, 2016). Member-nominated trustees make use of training and other resources, including some provided by the trade union movement, to equip them for their role. Similarly, worker directors would want to undergo training. They would also want opportunities to network with other colleagues carrying out the same role elsewhere. The TUC would organise a network for worker directors, as it does for member-nominated pension fund trustees, and would also work with unions and other organisations to provide suitable training and support. Worker representation on company boards works best alongside rights to ­representation and voice at other levels of the company, and worker representation on boards is just part of what the TUC would like to see established in terms of workers’ voice at work. The TUC is also calling for rights to collective consultation and collective bargaining to be strengthened, and believes that such measures

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would be mutually reinforcing.2 While worker board representation should not be viewed in isolation in terms of the workers’ voice and rights agendas, in terms of corporate governance debate it is the single most important corporate governance reform that could address the current lack of workers’ voice in corporate governance.

III. Conclusion This chapter has argued that shareholder primacy within corporate law does not serve the public interest and for this reason should be reformed. It has also argued that the lack of workers’ representation and voice in corporate governance constitutes a serious democratic deficit and that worker board representation would serve the overall public interest both by addressing this deficit and through boosting the quality of board decision-making. It therefore concludes by calling for mandatory worker board representation to be introduced in the UK. Workers’ participation is a critical missing element of the UK’s corporate governance system; and addressing this could make a significant contribution both to economic success and to economic justice.

References ‘A Report into the Ethnic Diversity of UK Boards’ Sir John Parker, The Parker Review, Committee Consultation Version 2 November 2016 www.ey.com/ Publication/vwLUAssets/A_Report_into_the_Ethnic_Diversity_of_UK_ Boards/%24FILE/Beyond%20One%20by%2021%20PDF%20Report.pdf. ACCA Technical Articles, ‘Diversifying The Board—A Step Towards Better Governance’ available at www.accaglobal.com/uk/en/student/exam-supportresources/professional-exams-study-resources/p1/technical-articles/ diversifying-the-board--a-step-towards-better-governance.html. Bailey, D (2015) ‘UK car output up—and down’ Birmingham Post (21 August 2015) available at www.birminghampost.co.uk/business/business-opinion/ uk-car-output-up-down-9902855. Benchmarking Working Europe 2016, ETUI 2016, www.etui.org/Publications2/ Books/Benchmarking-Working-Europe-2016. Conchon, A (2015) ‘Workers’ Voice in corporate governance: A European Perspective’ ETUI & TUC, www.tuc.org.uk/sites/default/files/WorkersVoicein CorporateGovernance.pdf. 2  See, for example, TUC, The gig is up: Trade unions tackling insecure work, June 2017 www.tuc. org.uk/sites/default/files/the-gig-is-up.pdf.

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Cunliffe, J (2016) ‘Are firms underinvesting—and if so why?’ Speech given by Sir Jon Cunliffe, 8 February 2017, www.bankofengland.co.uk/publications/­ Documents/speeches/2017/speech957.pdf. Department of Business, Energy and Industrial Strategy, Corporate Governance Reform Green Paper, November 2016 www.gov.uk/government/uploads/ system/uploads/attachment_data/file/584013/corporate-governance-reformgreen-paper.pdf. Department of Business, Innovation and Skills, Business Population Estimates 2015, URN 15/92. www.gov.uk/government/uploads/system/uploads/ attachment_data/file/467443/bpe_2015_statistical_release.pdf. Erdal, Chapter 11 in this volume. Gold, M (2011) ‘“Taken on Board”: An Evaluation of the Influence of Employee Board-level Representatives in Company Decision-making Across Europe’ 17(1) European Journal of Industrial Relations 41–56. Gold, M, Kluge, N and Conchon, A (eds) (2010) ‘In the union and on the board’: experiences of board-level employee representatives across Europe (Brussels, ETUI). www.theguardian.com/politics/2016/jul/11/theresa-may-to-call-for-unityequality-and-successful-exit-from-eu. Ireland, Chapter 1 in this volume. MacLeod, D and Clarke, N (2009) ‘Engaging for Success: Enhancing performance through employee engagement’ (London, BIS) http://dera.ioe.ac.uk/1810/1/ file52215.pdf. OECD (2017), OECD Corporate Governance Factbook 2017, www.oecd. org/16779C37-8229-417B-B768-26EF48276B7E/FinalDownload/DownloadId4757CD9092B10EFC37319B952ABF84EC/16779C37-8229-417B-B76826EF48276B7E/daf/ca/Corporate-Governance-Factbook.pdf. Office of National Statistics, Statistical bulletin Ownership of UK Quoted Shares: 2014, September 2015 http://webarchive.nationalarchives.gov.uk/ 20160105160709/http://www.ons.gov.uk/ons/dcp171778_415334.pdf. Rose, C (2005) ‘Medarbejdervalgte bestrelsesmedlemmer I danske virksomheder’ in Tidsskrift for Arbejdsliv, www.nyt-om-arbejdsliv.dk/images/pdf/2005/nr3/ ta05-3-34.pdf. RS 2011/1 (21 July 2011) The Takeover Panel Review Of Certain Aspects Of The Regulation Of Takeover Bids Response Statement By The Code Committee Of The Panel Following The Consultation on PCP 2011/1, www.thetakeoverpanel. org.uk/wp-content/uploads/2008/11/RS201101.pdf. Social Mobility Commission (2017) ‘Social Mobility, the Class Pay Gap and Intergenerational Worklessness: New Insights from The Labour Force Survey’. TASC (2012) ‘Good for Business? Worker Participation on Boards’ https://issuu. com/tascpublications/docs/worker_directors_final130712_6f2067114afc18. The Company Law Review Steering Group (1999) ‘Modern Company Law For a Competitive Economy The Strategic Framework’, http://webarchive. nationalarchives.gov.uk/20121029131934/http://www.bis.gov.uk/files/ file23279.pdf.

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The Company Law Review Steering Group (2000) ‘Modern Company Law For a Competitive Economy Developing the Framework’ http://webarchive. nationalarchives.gov.uk/20121029131934/http://www.berr.gov.uk/files/ file23248.pdf. The Kay Review of UK Equity Markets and Long-Term Decision Making, Final Report, July 2012 www.gov.uk/government/uploads/system/uploads/ attachment_data/file/253454/bis-12-917-kay-review-of-equity-markets-finalreport.pdf. The Pension Regulator (2016) ‘21st Century Trusteeship and Governance Discussion paper’ www.thepensionsregulator.gov.uk/docs/21st-centurytrusteeship-governance-discussion-2016.pdf and The Mckell Institute, The Success of Representative Governance on Superannuation Boards, June 2014 https://mckellinstitute.org.au/app/uploads/McKell_Super_A4_WEB.pdf. Tsagas, Chapter 7 in this volume. TUC (2013) Fund Manager Voting Survey, www.tuc.org.uk/sites/default/files/ TUC_Fund_Manager_Voting_Survey_2013.pdf. —— (2016) ‘All Aboard Making worker representation on company boards a reality’ www.tuc.org.uk/sites/default/files/All_Aboard_2016.pdf. —— (2017) ‘The gig is up: Trade unions tackling insecure work’ www.tuc.org.uk/ sites/default/files/the-gig-is-up.pdf. Wallenberg, J and Levinson, K (2012) ‘Employee board representation in Swedish industry—What has happened between 1999 and 2009?’Arbetsmarknad & arbetsliv www.intra.kau.se/dokument/upload/C10B992D09e41147CCItKs9BE720/ Wallenberg%20tryckt.pdf. Women on Boards Davies Review, Five Year Summary (October 2015) ‘Improving the Gender Balance on British Boards’ www.gov.uk/government/uploads/ system/uploads/attachment_data/file/482059/BIS-15-585-women-on-boardsdavies-review-5-year-summary-october-2015.pdf.

10 The New Corporate Movement NINA BOEGER

I. Introduction We live in a world of shareholder capitalism, dominated by markets, organised along capitalist principles and heavily reliant on the shareholder corporation as a central market actor. It is also an environment of democratic tension (Streeck, 2011), where the interests of corporate shareholders are often privileged in political debates, and the corporation itself has gained increasing power over the democratic political process (Wilks, 2013; Ruggie, 2017). Capitalism, in other words, has found ways to influence the democratic channels through which citizens may contest the dominance of both its theoretical underpinnings and its mainstream organisation, the shareholder corporation. These tensions not only define the thematic work of many critical contemporary commentators (Leys, 2003), they also represent the lived experience of millions affected by market-driven responses to recent financial and fiscal crises. But as the formal democratic process has become more difficult to access as a channel for political contestation to challenge the interests of corporations and their shareholders, the private market realm opens up an alternative space to formulate these challenges. There is a growing trend for those business entrepreneurs who are unconvinced by the overall benefits of the shareholder corporation, to use their ‘transactional’ (Morgan and Kuch, 2015) autonomy to set up firms that trade for financial gain like traditional companies, but that also incorporate social and/ or cooperative principles and values. The European Commission, for example, finds that the EU social economy, comprising cooperative and social entrepreneurship whose primary purpose it is to achieve social impact rather than deliver profit for company shareholders, currently generates 10 per cent of the European GDP (European Commission, 2015). In the UK, the number of social enterprise start-ups is higher when compared to that of general small and medium-size firms, and while most of them remain at small or micro business levels, a consistent cohort of social enterprises do trade at scale (Social Enterprise UK, 2015). Over 5,000 co-operative enterprises currently operate across the British economy, owned and controlled by around 15 million members (an increase of 16 per cent

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since 2010), and especially cooperatives in energy, agricultural, and health and social care sectors are performing well (Co-operatives UK, 2015). Merging aspects of community activism and business entrepreneurship, these are organisations set up with a social intention: to do good in the wider community and/or, in the case of cooperative businesses, to support and empower their members. But they recognise that investment, and an entrepreneurial vision, play a large role in enabling this to happen. They are categorically different from publicity-driven corporate social responsibility (CSR) initiatives because social and/or cooperative principles are written into their constitution and governance structure. But neither are they purely charitable or political forms of social intervention. Their activism is entrepreneurial precisely because it instrumentalises economic freedom—the capacity to undertake economic actions—as a way of transforming the existing liberal into a more social market economy. Activist-entrepreneurship, this chapter argues, characterises a new corporate movement that challenges the structure, interests and dominance of the shareholder corporation, at a time when the traditional democratic political process is influenced by its power and therefore less open to channelling these challenges. The chapter develops an understanding of this movement and its potential to facilitate this contestation, building on Polanyi’s ideas around the relationship between politics and markets as well as Touraine’s work on the capability of individuals to take action and challenge social norms. But the chapter also considers the continuing relevance of systemic linkages between political and global economic power that shape the wider regulatory environment in which these alternative enterprises operate. In the UK, for example, while flexible corporate legal forms that organise social and cooperative enterprises are now available, the wider regulatory environment continues to offer relatively few genuine incentives to develop more radical alternative corporate models on a broader scale. In practice, therefore, entrepreneurial activism requires sustained effort to ensure their regulatory context accommodates and nurtures the development of new models.

II.  Polanyi’s Counter-movement and Corporate Power The re-emergence of Polanyi’s scholarship in contemporary research and amongst activists, especially since the turn of the millennium with growing globalisation of capital markets and its recurrent crises, is no surprise. By providing a sharp counter-narrative to classic neoliberal economic theory but without fully adopting a class-based Marxist analysis, Polanyi offers an alternative theoretical angle on capitalism that emphasises the importance of political and social ordering to ­harness the market’s ability to operate in the interest of humanity, rather than

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allowing its destructive force to take over. His writings develop an understanding of our humanity which—not dissimilar from Durkheim’s emphasis of social solidarity as essential condition, or Nussbaum’s approach to human capability human capability (Nussbaum, 2011)—dismisses the centrality of our role as economic actors as espoused by neoliberal theory. Instead, Polanyi insists that human needs, beliefs and character—as citizens, workers, business partners, friends, relations etc—are formed and embedded across the diverse variety of our social interactions with each other (Polanyi, 2002 (1944)). Understanding markets as political constructs, dependent on collective social and regulatory choices but never ‘free’ in the way that neoliberal theory would suggest, Polanyi posits that counter-movements to embed and regulate market forces—to counter especially the destructive social effects of labour commodification—are necessary for a capitalist political economy to remain sustainable in the long term. He understands these movements as a form of social struggle, enabling society to challenge and avert the potentially crushing effects of unregulated capitalist ordering, especially for workers and those without access to the capitalist means of production. Polanyi’s call for market-embeddedness, in other words, is a call for social regulation, contestation and political redistribution (re-balancing) of economic power and resources as an essential condition for sustainable capitalism (Block and Somers, 2014). Writing in 1944, Polanyi outlined important constraints that recur today in the work of modern anti-globalisation, anti-capitalism and anti-corporation movements (Osborne, 2009). He acknowledged that the global economic order conditions social conflicts within nations, and that limitations facing national social struggles were themselves global phenomena, playing out within the confines of each nation state. Today, this inability of the nation state, and the democratic political system, to respond effectively to what Touraine describes as ‘non-social forces strengthened by globalisation’ (Touraine, 2007: 209) not only defines the thematic work of many critical contemporary commentators (Leys, 2003; Streeck, 2011). It also constitutes the lived experience of millions affected by market-driven responses to recent financial and fiscal crises, and characterises the deep ongoing social and democratic crises of transnational political organisations (De Witte, 2015). Using the channels of our political democracies as a way of challenging the logic of market liberalism and its underpinning capitalism has become more difficult, for arguments in their defence—foremost the argument that our societies’ wealth and well-being depend crucially on their economic competitiveness and growth— tend to overshadow more market interventionist approaches. In the words of Fred Block, ‘the social groups that amass behind the banner of laissez-faire have been able to claim that their nation would become an isolated backwater if it failed to expand the scope of markets’ (Block, 2008: 3–4). In addition, the shareholder corporation itself has grown its power to influence debates, shape and spread these arguments. There is no shortage of research

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to make apparent how deeply corporate power is woven into the system of political democracies, exerting influence over individual and collective political ­decision-making, nationally and inter- or transnationally (Bakan, 2005; Wilks, 2013; Jones, 2015). This power takes different forms.1 Beyond what we may think of as a ‘traditional’ form of business lobbying (what Ruggie refers to as its instrumental power), the corporation also exerts structural power including, as Ruggie puts it, ‘locational choice sets, the ability to transfer risks to suppliers, and generally the ways in which business gets things onto or keeps them off the policy agenda’. But perhaps the most important form of corporate power over political process is of a discursive kind (a third category proposed by Ruggie), referring to ‘the ability by business and business associations to frame and define public interest issues in their favour—that is, to shape ideas that then come to be taken for granted as the way things should be done, even for non-business entities like governments’ (Ruggie, 2017: 5). This suggests corporate power has become not only endemic but also epistemic. It shapes our political democracies but also influences how our societies frame their knowledge (how they see the world) and, consequently, how we build our institutions. These influences affect the ability of governments to produce effective national, trans- or international regulation of the shareholder corporation to address corporate malfeasance and prevent its socially, economically and ecologically destructive effects (Corporate Reform Collective, 2014). As the power of shareholder corporations in our political democracies has grown, their privileges have become accepted and often taken for granted while social counter-­movements where political democratic process steps in to contest, control and formally regulate markets and corporates, find it more difficult to assert themselves.

III.  Rise of Social, Cooperative and Commons-oriented Enterprise Given the problems of channelling social counter-movements through political processes, we might consider the relevance of the private (market) realm as an alternative space to contest the structure and the power of the shareholder corporation. We might consider not only organised anti-globalisation protest and ethical consumerism, but also social and democratic forms of entrepreneurship that establish themselves as alternatives to shareholder capitalism, including employeeowned and cooperative businesses that reduce the commodification of labour (or, more generally, the means of production); and social enterprises that challenge the linkage between economic activity and profit motive, and even the exclusive

1 

See also Talbot, ch 6 in this volume.

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role of competitive market exchange as a mode of running commerce (Parker et al, 2014). Whereas the overriding incentive for corporations, their managers and investors, is to maximise financial returns to shareholders over time, these alternative corporate governance and ownership models enable businesses to pursue not only return on capital but also give priority to other aims. These may include improved consumer satisfaction and the quality of their products, innovation, working conditions, or wider social or environmental objectives that benefit the community or society at large. These priorities will be embedded in the structure of the business; its governance rules, ownership model and the objectives it formally commits to in its constitutional documents. To follow Polanyi’s thinking, these alternative models structurally incorporate, within the business’ organisational form, the understanding that economic activity is sustainable only if embedded within human concerns. Rather than prioritising the pursuit of profit and return on investment, they focus on a more complex set of aims and values; which aligns with Polanyi’s argument that markets remain shaped by individual and collective human choice. In this way, the development of counter-models to the shareholder corporation serves society to formulate a response to the latter’s ‘excess and malfeasance’ (Blowfield and Murray, 2014: 5) and the destructive effect of global markets on social and societal standards. The literature discussing socially-oriented businesses (broadly speaking) has been growing steadily. One strand of it comprises largely policy- and practicedirected initiatives, often with a focus on particular regional and local models (Prakash and Tan, 2014; Bertha Centre, 2015; Social Traders, 2016).2 A second strand focuses on the development of legal models, their flexibility and effectiveness (Mac Cormac and Haney, 2012; Esposito, 2013). Another strand consists of, often multi- and inter-disciplinary, academic work that highlights underlying assumptions and wider trends (Atzeni, 2012; Parker et al, 2014; Novkovic and Webb, 2014), pointing towards similarities of alternative models as well as their variation (Orsi, 2012; Ridley-Duff and Bull, 2015). The lack of coherent terminology, however, remains a difficulty across the literature, where a bewildering number of concepts and labels are on offer, including ‘social business’ or ‘social enterprise’, ‘community business’, ‘mission-led business’, ‘blended enterprise’ and the ‘sharing economy’, as well as references to ‘economic co-operation’, the ‘democratic firm’, ‘worker self-directed enterprises’ or a ‘new’ co-operativism including ‘open’ and ‘multi-stakeholder’ cooperatives etc. The following map sketches three particular models—social enterprises, cooperative enterprises and commonsoriented governance—that cover important ground in these debates, but it also exposes ambiguities and overlaps between them.

2  See also the various reports produced by the British Council on the state of social enterprise globally, available at: www.britishcouncil.org/society/social-enterprise/reports.

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IV.  Social Enterprise Social enterprise has developed as a moniker for socially-oriented corporate ­models that reinvest most of their profits back into the business or the local community, in support of a wider social, economic or environmental purpose (Social Enterprise UK, 2015; Ridley Duff and Bull, 2015). Conceptually, these enterprises challenge the separation of private sector (for-profit) and voluntary sector (nonprofit) norms, emphasising, as Ridley-Duff points out, that we might instead need to ‘review the way social norms for constituting joint-stock companies and non-share companies have developed. … Do we have to choose between these two models?’ (Ridley-Duff, 2015: 26–28). The Grameen foundation, starting up as a network of local microfinance groups in the 1970s to combat poverty in Bangladesh, is one of the most well-known social business initiatives and a classic example of social enterprise in the above sense, described as a ‘non-loss’ business where any surplus derived from its trading activities is re-invested into the company (Ridley-Duff and Bull, 2015: 109–11). Writing in 2010, its founder Muhammad Yunus still bemoaned the absence of tailored regulatory frameworks to accommodate his social business model, but conceded that some alternative legal structures were available to establish firms that would sit between a nonprofit charity on the one hand, and an out-and-out for-profit company on the other (Yunus, 2011: 117–32). One of these is the British model of the ‘community interest company’ (CIC) introduced by national regulation in 2005.3 Over 12,500 CICs currently operate as social enterprises in Britain, under a regulatory regime that requires an annual report to a designated regulator demonstrating that their trading activities continue to support a social venture, and that also limits their ability to distribute shareholder dividends or the sale of the firm’s assets.4 One concern with the CIC format is the lack of clarity on how democratic (open or non-hierarchical) its corporate governance model is. The relevant regulation renders CIC directors accountable to the regulator for the social value their business generates for its stakeholders, but it leaves open how they ensure the involvement in the relevant decision-making of those who participate in, or are directly or indirectly affected by, the business (workers, consumers, creditors, community stakeholders etc). The regulator, who receives the company reports, has issued guidelines; and an advisory corporate governance framework makes general recommendations on these matters, but it does not include anything more prescriptive or detailed.5 Some would argue that a more streamlined process for

3 Companies (Audit, Investigations and Community Enterprise) Act 2004 and Community I­nterest Company Regulations 2005 (SI 2005/1788); as amended by The Community Interest Company (Amendment) Regulations 2009 (SI 2009/1942) and The Community Interest Companies ­(Amendment) Regulations 2014 (SI 2014/2483). 4  See also Boeger et al, ch 18 in this volume. 5  Boeger et al., ch 18 in this volume.

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stakeholder involvement in its decision-making would improve the CIC format’s credentials as a business model to meaningfully reflect wider stakeholder interests. The underlying point of these arguments runs across the social enterprise sector more widely, reflecting tensions between a managerial and communitarian understanding of social enterprise. The former, often associated with a style of social enterprise typical for the US, associates it with a business entrepreneur’s individual response to particular social concerns, not unlike the concerns of corporate philanthropy. The latter, on the other hand, which at least historically characterises European-style social enterprises, considers it in essence to be a collective entrepreneurial exercise where external community values and internal social (democratic) values should align (Ridley-Duff, 2007). These tensions remain a live issue in the debates on developing social enterprise forms (Kerlin, 2006; Mac Cormac and Haney, 2012; Esposito, 2013). Social enterprise itself remains a spectrum of options (Ridley-Duff and Bull, 2015) in terms of governance models and choice of legal form, the type and level of community engagement, scale of investment, business size and the level of trading activity, and especially around the question what proportion of re-investment into the social venture is required (Nicholls, 2006). While some consider the diversity and openness of social enterprises an obstacle for their development, others have interpreted these features positively as a driver for social and economic innovation (Defourny and Nyssens, 2003: 32–33).

V.  Cooperative Enterprise Cooperative enterprises are co-owned by those who participate in the business, and they feature significant elements of democratic governance (Ellermann, 1990; Restakis, 2010; Wolff, 2012). They are also currently growing their presence worldwide, moving way beyond the traditional heartlands of historical cooperative movements such as Italy or Spain (Zamagni and Zamagni, 2010). As with social enterprises, cooperative businesses come in a great variety of legal forms. They range from local to larger scale, and have established themselves across the economy from banking and energy to food, health and housing. Depending on the model chosen, their members may include different stakeholders such as consumers or users, workers, tenants, enterprises or community-members. Especially employee co-ownership and co-governance, whether in the form of limited companies, cooperatives or partnerships, are meeting with growing popularity as a means to re-shape the role of labour as a form of human capability (Nussbaum, 2011) rather than as a commodity, and to address the economic inequality between labour and capital (Erdal, 2011; Kruse et al, 2010; Cheney et al, 2014). While some commentary still dismisses the suggestion that employeeowned businesses could be as productive as traditional shareholder firms as unrealistic, others point to growing research data suggesting that employees and their business will do (and feel) better if they co-own and have a greater say in the firm,

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and that cooperation can boost innovation, business entrepreneurship, economic development as well as wider democratic engagement (Cheney et al, 2014; Mayo, 2015; Pérotin, 2016). There is critical debate whether cooperative enterprises really do guarantee social standards and ethical values. Corporate malfeasance involving large employee-owned enterprises, not least the UK’s very own Cooperative Group whose Cooperative Bank was fined £40 million in 2012 for mis-selling payment protection insurance to many of its customers, reinforce arguments that capitalist market pressures induce cooperative enterprises to resort to standard corporate practices on pricing and wages, sometimes even unlawful or criminal corporate behaviour (Tomlinson, 2013). Other studies however point to successful examples such as the Mondragon Cooperative Group, a large employee cooperative enterprise in the Basque country, to argue that pressure to operate at a global scale can be reconciled with social and cooperative values as long as expansion strategies are adapted to the specific needs of the cooperative enterprise (Flecha and Ngai, 2014). The diversification of cooperative enterprises has brought them closer to the communitarian model of social enterprise. Arguably, cooperatives have historically had a stronger orientation towards community values than investor-owned companies, but their members have traditionally been their primary beneficiaries.6 Since the 1990s, however, more specific cooperative models have begun to emerge that commit their enterprise explicitly to a social venture, prioritising either a group of external beneficiaries or opening up their membership to the wider community (or a wider group of specified beneficiaries, including community members). Italy for example has designated a legal form to ‘social cooperatives’, largely as a vehicle for providing community care services (Defourny and Nyssens, 2013). Early social enterprises like the Grameen Foundation were, as Rory Ridley-Duff argues, themselves rooted in cooperative principles as ‘projects that combined member ownership with sustainable development goals.’ Ridley-Duff himself is one of the British pioneers in ‘new cooperativism’ which, he describes, ‘places more emphasis on shared return and solidarity between stakeholders, and places less emphasis on meeting the needs of a single stakeholder’ (Ridley-Duff, 2015: 17–19). His ‘FairShares’ model offers the legal blueprint for a multi-stakeholder cooperative enterprise, including a commitment to cooperative principles and a social or community purpose but also an opportunity to issue different types of shares to founders, investors, users and workers in the business, with democratically allocated voting rights (one person one vote). The model presents a radically new approach to valuing investments where not only the providers of financial capital will get a return, but also the contributors of other types of capital that is

6  The international cooperative principles, formulated by the International Cooperative Alliance in 1995, certainly include a commitment to contribute to the sustainable development of the whole community.

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required to make production possible. The model therefore includes, in addition to investor shares, also labour shares, founder shares and user shares to reflect these different types of capital (Ridley-Duff, 2015: 30). It is early days yet, but this and other similar initiatives of ‘open coops’ (Davies-Coates, 2014) suggest that cooperative and social enterprise are merging in radically new forms.

VI.  Commons-oriented Enterprise Commons-oriented governance promotes the socialisation rather than privatisation of private property, in particular, intellectual property, and in doing so, challenges a foundation of the capitalist market model. The FairShares model, for example, is the blueprint for an open cooperative and commons-oriented enterprise. The purpose is that members share any IP they generate and distribute the return on these rights fairly: ‘just as a financial investor gets back both their original capital plus a dividend, so an intellectual (labour) investor gets back both their original capital plus any dividend to which they are entitled’ (Ridley-Duff, 2015: 37–38). Bauwens and Kostakis propose that these or similar models, which are also increasingly discussed in the US, could address the weaknesses of commonsoriented ‘peer-production’ networks in fields such as free software, open design and open hardware whose aim it is to ‘create common pools of knowledge for the whole of humanity’ (Bauwens and Kostakis, 2014: 356). These weaknesses (free-riding) arise because commercial start-ups or established capitalist companies may exploit and capitalise on the common source which the networks make freely available. Where, however, they are tied into a commons-oriented cooperative enterprise, its members will share the returns while cooperative membership remains inclusive and open. In the US, a movement towards ‘platform cooperativism’ has already gained momentum as a particular form of the ‘sharing’ economy, where those who provide and use the services and experiences mediated by internet platforms should own and control the platforms themselves (Orsi, 2012; Morgan, 2016).

VII.  False Alternatives? Some models on the other hand turn out to be false alternatives or largely managerial variations of shareholder capitalism. For example, social enterprises differ in principle from the publicity-driven corporate social responsibility (CSR) initiatives so widespread amongst mainstream companies. CSR encourages capitalist businesses to engage with wider social and environmental issues but without compromising their primary purpose to pursue profit for shareholders. The primary commitment of social enterprises, on the other hand, is to make money

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to advance their social venture, rather than vice versa (Kazmi et al, 2016; Priede et al, 2014). Similarly, some popular online platforms, while widely shared, should not be confused with a commons-based or open cooperative corporate model. Investorowned platforms like Uber and Airbnb have been criticised for describing themselves as a ‘sharing’ economy, when in fact they are run like traditional shareholder corporations, for capitalist return on investment. Schor for example argues that their technologies ‘are potentially powerful tools for building a social movement [centred] on genuine practices of sharing and cooperation in the production and consumption of goods and services. But achieving that potential will require democratizing the ownership and governance of the platforms’ (Schor, 2014: 1). But not all employee-owned or -managed corporate models involve genuinely democratic or non-hierarchical governance structures. Employee shareownership features in many mainstream companies, including major FTSE 100 businesses (Kruse et al, 2010), but often it transfers no real influence and can be easily reversed (Erdal, 2011: 20). Enron, WorldCom and Lehman Bros were all firms with extensive employee-shareholdings, with disastrous consequences for at least some of the employee-shareholders following these companies’ embroilment in corporate scandal that eventually lead to their collapse (Blasi et al, 2014: 102– 05). But even in successful corporations, studies of US employee stock option plans have exposed risks that these are unevenly distributed within firms and lacking in fairness, and that they are subject to wide managerial discretion unless effective government enforcement directs otherwise (Blasi et al, 2014: 195–223). Employeemanagement is also not uncommon in mainstream firms, and sometimes it is legally enforced (for instance by co-decision legislation, as is currently still the case in Germany). But in practice, employee-managers tend to operate with only limited discretion and within the broad parameters of the shareholder value corporate governance model, executing decisions handed down from company directors. In the majority of cases, these are not alternatives to shareholder capitalism, but simply a variation on its management, unless further-reaching changes are secured with a view to democratising corporate governance and ensuring the fair distribution of profits to both employees and capital investors (Ellermann (2005 (1990)); Wolff, 2012).

VIII.  New Corporate Movement While these false alternatives should be carefully distinguished, the emergence of social, cooperative and commons-oriented enterprises (and including many hybrid forms) suggests that a counter-movement to the investor-owned corporation is happening, through a variety of alternative business forms. These alternative models emerge in response to social, economic or environmental concerns, often but not always with a local dimension, and in a variety of different ­socio-economic

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conditions: a hotchpotch of worldwide initiatives, ranging from small-scale worker cooperatives in rural Greece (Gidarakou, 2015), to internationally operating B-Corps7 like Ben & Jerry’s ice cream business in the US. To appropriately understand their emergence as a corporate movement is an important, and more than semantic, choice. The underpinning argument is also normative—that these forms of entrepreneurship constitute a distinct counter-movement that, despite being internally diverse, shares a concern for developing a more social economy. Anti-corporate movements have been previously linked to the generation of social and cooperative entrepreneurship, generally because they were found to create a more positive environment for new organisational forms as a result of their lobbying powers, and support the development of regulatory infrastructure and networks as a space for theorising and debate (Schneiberg et al, 2008). In the modern context, for example, the aim of wider protest movements against market-based responses to the recent economic crisis, including UK Uncut, Los Indignados and Occupy, is to generate debate on anti-capitalist themes that are also directly relevant to social and economic entrepreneurship (Mills, 2013: 54). The present analysis, however, proposes that these forms of entrepreneurship themselves constitute a movement, in the sense that they reflect distinct collective and individual choices to change the existing economic order, by entrepreneurial means. People become activist entrepreneurs for different individual reasons— to annoy their parents, impress their friends, make their community (country, the world etc) a better place, and so on. But for most, these decisions involve a process of ‘de-integration’ that requires more than commercial astuteness or an appetite for innovation; a deeper psychological and sociological process where the individual in question takes responsibility for social change. Individuals who are otherwise well-integrated into capitalist society and its accepted norms and expectations develop a ‘will to act and to be recognized as an actor’ capable of social creativity and contestation through their entrepreneurship (Touraine, 1995: 207). French historical sociologist Alain Touraine describes these sorts of decisions as processes of ‘de-integration’ whereby individual members reflect and distance themselves from their personal circumstances and their accepted roles in society. It is by stepping outside these dominant social norms that they turn their unquestioning and well-adapted ‘Self ’ into a ‘Subject’ committed to social struggle. Making this leap (Touraine also refers to it as ‘subjectivation’) will not affect all parts of an individual’s life, but there is, he argues, a tension in most people’s lived experience between their personal existence (as ‘Self ’) which sees them well integrated and living in accordance with accepted social normal and personal expectations; and their commitment as ‘Subject’, where they refuse to surrender to the values of the accepted logic or order unquestioningly, and instead seek to creatively contribute to producing the ethical standards that come to define their society (­ Touraine, 1995: 242–89; 2002; 2007). It is, as King puts it in a comment on

7 

See Hunter, ch 13 in this volume.

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Touraine, ‘through this striving for the process of subjectivation that the Subject becomes social movement’ (King, 2006: 875). Touraine’s reflections capture the experience of most individuals who choose to organise a corporate business in ways that significantly depart from the mainstream shareholder model. Following a process of reflection and a level of deintegration, these activists deploy their entrepreneurship to step up to the role of Subjects and facilitate social movement—literally, to move forward the social and economic order that they live in, in ways that diverge significantly from the prevailing model. David Erdal for example retells his decision in the 1980s to turn his family-­ business into a worker-owned and democratically governed firm rather than sell to private equity.8 He recounts both the general expectation that he would continue to run the firm as a capitalist business (his adapted role), and the psychological process that led to his de-integration, where he distanced himself from the role. Central to the process was his ‘concern about the powerlessness of the employees’, driven not by a ‘paternalistic affection’ but rather by a mixture of business sense and ethical considerations of fairness. Not only did he consider their lack of power bad for business—‘Why should the employees bother to do anything other than the absolute minimum to keep their jobs?’—he also refused to surrender to the accepted logic that employees should be content as long as they have a job, when ‘in reality, the only truthful message I could give to the young people on the shop floor was that they were working to make my family rich.’ Instead he went on to build up the firm as a democratic enterprise, re-producing his own ethical standards within the firm and, by extension, in the community that it would affect (Erdal, 2011: 8–10). These individual or micro-level experiences generate, at the macro-level when taken together, a counter movement in the sense that Polanyi suggests it. Increasingly unconvinced by the benefits of global market economies and traditional shareholder corporations to create a ‘good life’ for more people on the planet, the private ‘transactional’ sphere (Morgan and Kuch, 2015) offers individual business entrepreneurs a space for social struggle which, in growing numbers, they are taking up. And so, at a time when the economic theory of liberal capitalism continues to dominate mainstream political processes, activist-entrepreneurship is reconfiguring the role of markets, the state and civil society in ways that challenge the orthodox foundations of capitalist ordering (Bauwens and Kostakis, 2015; Alperowitz and Dubb, 2013). This new corporate movement is a mode of contestation that relies on entrepreneurial activity to challenge prevailing so-called free-market ideology—and more directly, the shareholder corporation as both the institutional expression and key proponent of this ideology—in a context where other channels of contestation, and in particular the means of political democracy, have become less

8 

Clearly in line with his theoretical thinking today. See Erdal, ch 11 in this volume.

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effective with the rise of corporate power. It does so by creating counter-models to shareholder capitalism that present corporate organising as a matter of individual and (ultimately) political choice, not a process that follows the inevitable laws of a pre-determined market logic and shareholder profit. Merging community activism and an enterprising vision, its key characteristic is that it instrumentalises economic freedom—the capacity to undertake economic actions—as a way of transforming the existing liberal into a more social market order. TINA becomes TARA: the neoliberal slogan that ‘There is no Alternative’ to shareholder capitalism and the capitalist firm, is replaced with a rather more positive and forward-looking ‘There are Real Alternatives’. The new corporate movement reconfigures opportunities for corporate organising from a point that is fundamentally accepting of the dominant model, to one where it is radically contested, and where ‘[o]ther ideas are available’ (Parker et al, 2014: 40).

IX.  Building the Regulatory Environment But the traditional public realm—governments and the democratic political process, states and their international organisations, taxes and state benefits, laws and regulations, policy and media, pressure groups and trade unions—continues to provide the ‘eco-system’ (European Commission, 2014) upon which social, cooperative and commons-oriented enterprises depend. Balancing financial sustainability and growth on the one hand, and a commitment to social and/or cooperative values on the other, is a complex exercise demanding, foremost, robust business governance and means of conflict resolution, but also the availability of suitable and effective regulatory tools which only the public realm can provide. Similarly, the decision to become an activist entrepreneur and run against the culture of shareholder capitalism is one that requires both motivation and an ethical impulse. The existing movement can go some way to generate more of these, especially by developing peer-to-peer infrastructure and networks to promote alternative approaches to entrepreneurship.9 But to an even greater extent, individuals’ opinions and ethical inclinations will be formed by the mainstream media, public discourse and political policies. As long as these debates marginalise social, cooperative or commons-oriented enterprise by dismissing them either as

9 Social Enterprise UK, UnLtd and Cooperatives UK are three leading associations advocating alternative enterprise models in Britain. Internationally, the Ashoka network of social entrepreneurs (www.ashoka.org/) and the Global Social Entrepreneurship Network (www.gsen.global/). See also the work of the British Council on the international development of social enterprise, available at: www. britishcouncil.org/society/social-enterprise; as well as the International Cooperative Alliance and various UN based initiatives (including the International Year of Cooperatives in 2012), and cooperative organisation at European level, including The Cooperatives Europe Association (https://coopseurope. coop/) and the European Confederation of Workers’ Cooperatives, Social Cooperatives and Social and Participative Enterprises (www.cecop.coop/).

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an economic ‘fantasy’ (Parker et al, 2014: 367) or a social-economy niche without considering their wider potential to integrate an economic and social mind-set in any serious way (Ridley-Duff, 2007), attempting to activate more social capital for a new corporate movement remains an exercise against the odds. The scope and the means of regulatory support that governments are prepared to offer to social, cooperative and commons-oriented enterprises is a policy choice they will take (similarly, for regional organisations like the EU). The United Kingdom, for example, has some regulatory ‘building blocks’ (Mayo, 2015: 17) in place for a vibrant social and cooperative economy, largely because it offers a reasonably flexible set of legal forms that both social, cooperative and commonsoriented enterprises may adopt and develop, including the CIC format, B Corp certification as well as various cooperative structures.10 Solidarity-based models like ‘FairShares’ for example, are legally practicable within the options available, to be set up as companies limited by share, as associations or cooperative societies. However, support for social, cooperative and common-oriented businesses in the wider regulatory environment is still less developed, and the environment remains difficult for these organisations to navigate. Public procurement for example is one potential means for the state to nurture the development of social, cooperative and commons-based enterprises. In the context of public services privatisation, reliance on these enterprises in the provision of essential services offers a potential win-win. On the one hand, it provides an opportunity for the state to reduce certain risks and costs that rise when these services are entrusted to large shareholder corporations. These include the risk of rent-seeking and underperformance, and financial risks where large corporate providers become ‘too big to fail’ (National Audit Office, 2013; House of Commons, 2014; Social Enterprise UK, 2012), but also the cost of resource-intensive public contract management to ensure profit-seeking does not ‘crowd out’ public concerns (service quality, accessibility, social justice, environmental standards etc) in the delivery of public contracts (National Audit Office, 2014). On the other hand, by nurturing alternative corporate forms through public procurement, the state provides them with income and a degree of stability, enabling them to establish themselves on the market and to attain and/or maintain a level of sustainability. Initially at least, these enterprises rely on the largesse of the state (payment for public service delivery) as a form of incubation so that by delivering public contracts, social, cooperative and commons-oriented corporate forms grow capacity to enable them to deliver private contracts and to participate in and to shape the wider economy (Boeger, 2018). However, the regulatory environment that could enable this type of win-win to happen is still marked by complexity and uncertainty in the UK. A positive step was recently taken with the enactment of the Public Services (Social Value) Act 2012. The law requires public authorities to consider, when they tender large

10 

See, respectively, Boeger et al, ch 18, Hunter, ch 13 and Mangan, ch 15 in this volume.

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public service contracts, to what extent they will seek not only commercial valuefor-money, but also look for tenders that improve the wider ‘social, economic and environmental’ well-being of the relevant community. The Act was greeted with optimistic anticipation by social and cooperative enterprises because many of these businesses have social value—a commitment to a social or environmental mission and governance structures that include stakeholders—embedded in their constitution. The Act’s encouragement of a more flexible definition of procurement outcomes therefore could, it was argued, be a game changer for social and cooperative enterprises and their role on public markets (Boeger, 2017). However, initial research into the operation of the Social Value Act revealed that uptake of the legislation has been mixed (Social Enterprise UK, 2016), and that, for the law to be more effectively and consistently applied, both businesses and authorities require further guidance on how to procure for social value, on what exactly constitutes social value and how it should it be measured (Boeger, 2017). There are also concerns, including among social enterprises, that merely requiring authorities to ‘consider’ social value is insufficient, and that the legal framework should be further tightened to impose stricter obligations on authorities (Social Enterprise UK, 2013). These experiences highlight that a clear and unambiguous regulatory framework for public procurement to nurture social, cooperative and commons-oriented enterprises in the UK is still some way off. Similarly, the government’s general policies to support social and cooperative entrepreneurship have been criticised as unduly narrow and committed to the pursuit of marketisation (Bland, 2011; Social Enterprise UK, 2015). Its social enterprise and mutualisation initiatives invariably promote small- and mediumsized entrepreneurship generally, and social and cooperative models especially as a means to improve cost efficiency (and potentially progress privatisation) of public services.11 The position on tax incentives for social investors is also ambiguous. In 2014, the government introduced a ‘social investment tax relief ’ scheme to attract interest from capital investors in the social enterprise sector, recognising that demand for finance in the sector remains high. However, the scheme excludes companies limited by guarantee, a preferred corporate form amongst social enterprises in Britain. It has also been criticised as an attempt to give the government’s strategy to move from direct or grant-funding of public services towards loans and venture capital, a ‘veneer of respectability’ (Huckfield, 2015). This, however, could have serious implications for the type of social ventures that will be sustainable in the longer term, because ‘priorities start to be assessed based on which social outcomes can be profitable, monetised or marketised. Social issues where it’s difficult to put a financial value on the outcomes will become much harder to fund’ (British Council, 2014: 4). The issue in the UK is therefore not so much that legal forms to pursue social, cooperative and commons-oriented entrepreneurship are unavailable or 11  Updated online information available at the Cabinet Office’s Mutuals Information Service, www. gov.uk/government/groups/mutuals-information-service.

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not ­flexible enough. Rather, the wider regulatory environment—the regulatory ‘eco-system’ taken as a whole—still provides few clear and directed incentives to develop radical alternative, social and cooperative, corporate models on a larger scale. There are parallels between developments in the UK and those elsewhere (Orsi, 2012), and these highlight a more general point. One challenge for the new corporate movement is to take up concrete regulatory issues—questions of how to incorporate ‘social value’ into procurement law, how to structure tax incentives and so on—that are vital in shaping the context in which social, cooperative and commons-oriented enterprises operate. In some cases, they will be vital to the survival of these organisations. The role of collective associations representing the interests of social, cooperative and commons-oriented entrepreneurship—two leading examples are Social Enterprise UK and Cooperatives UK in Britain—will be central to the task of ensuring (by lobbying, organising, informing, a­ dvising etc) that appropriate regulatory frameworks are in place and that these are ­well-understood by activist-entrepreneurs or anyone wishing to be one.

X. Conclusion The worldwide growth of alternative forms of the business enterprise constitutes a movement that challenges key principles of shareholder capitalism and the power of corporations. Social, cooperative and commons-based enterprises come in a great variety of organisational forms, but the works of both Polanyi and Touraine help us expose some common dynamics that suggest they have the character of a new corporate movement. Polanyi’s understanding of the political economy broadly sets out the case for counter movements to global economic forces, but also highlights their political limitations. Touraine’s sociological work, on the other hand, conceptualises the personal transformations that drive people—including, for our purposes, entrepreneurs or those with an interest in entrepreneurship—to develop an identity as activists and to join, or rather to become, a social movement. Activist entrepreneurship characterises the development of social, cooperative and commons-based forms of alternative corporate organising. It constitutes a mode of contestation that makes use of the availability of private or transactional autonomy—the capacity to contribute to the market place—at a time when political democracy has become less effective at channelling these challenges, because corporate power dominates many political processes. The political message at the heart of the new corporate movement is a direct and radical response not only to the structural dominance of shareholder capitalism but also to the dogmatic proposition that its economic logic is an inevitability if our aim is to create wealth and wellbeing for our societies. The alternative position—which this movement stands for—is that capitalist, and by extension corporate, organising remains a matter of individual and collective political choice, and as such open to hard questions of whether it delivers a ‘good life’ to enough people on the planet. Real organisational

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alternatives to the mainstream shareholder model and its composite principles of managerial control, shareholder primacy, profit-motivation and a separation of labour and capital, exist. They represent not just utopian ideals, but they are the lived business models that, by operating in an economically, socially and ecologically sustainable way, offer a radical response to the continuing failings of the shareholder corporation to act as a socially responsible institution. But for this to happen widely and effectively, it is necessary to develop a wider regulatory ecosystem that is both nurturing and accessible to social, cooperative and commonsoriented enterprises. Having a flexible and pragmatic corporate legal framework that is adaptable to new business models, as is the case in the UK, is a first step, but it also relies on the wider regulatory context—from public procurement to tax law and so on—to accommodate and nurture these alternative models more broadly.

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HM Government (2014), Open Public Services, available at: www.gov.uk/ government/uploads/system/uploads/attachment_data/file/291854/Open_ Public_Services_Progress_Report_2014.pdf. House of Commons (2014), Committee of Public Accounts, Contracting out Public Services to the Private Sector, 47th Report of Session 2013–14 on 14 March 2014. Huckfield, L (2015) 2015—a Year for Killing Social Enterprise, Coops and Mutuals, 13 January 2015, available at: www.huckfield.com/blog/2015-a-yearfor-killing-social-enterprise-coops-and-mutuals/. Jones, O (2015) The Establishment: And How they Get Away with It (London, Penguin Books). Kazmi, BA, Leca, B, and Naccache, P (2016) ‘Is Corporate Social Responsibility a New Spirit of Capitalism?’ 23(5) Organization 742–62. Kerlin, JA (2006) ‘Social Enterprise in the United States and Europe: Understanding and Learning from the Differences’ 17 Voluntas 247–63. King, DS (2006), ‘Activists and Emotional Reflexivity: Toward Touraine’s Subject as Social Movement’ 40(5) Sociology 873–91. Kruse, DL, Freeman, RB and Blasi, JR (2010) Shared Capitalism at Work: Employee Ownership, Profit and Gain Sharing, and Broad-based Stock Options (Chicago, University of Chicago Press). Leys, C (2003) Market-Driven Politics: Neoliberal Democracy and the Public Interest (London and New York, Verso Books). Mac Cormac, S and Haney, H (2012) ‘New Corporate Forms: One Viable Solution to Advancing Environmental Sustainability’ 24(2) Journal of Applied Corporate Finance 49–56. Mayo, E (ed) (2015) The Co-operative Advantage: Innovation, Co-operation and why Sharing Business Ownership is Good for Britain (Manchester, Co-operatives UK). Mills, C (2013) ‘Past, Present, Future’ in R Harrison (ed), People over Capital: The Co-operative Alternative to Capitalism (Oxford, New Internationalist Publications). Morgan, B and Kuch, D (2015), ‘Radical Transactionalism: Legal Consciousness, Diverse Economies and the Sharing Economy’ 42 Journal of Law and Society 556–87. Morgan, B (2016), ‘A Thousand Flowers Booming’, STIR Magazine, Blog of 11 January 2016, available at: www.stirtoaction.com/blog/a-thousand-flowers-blooming. National Audit Office (2013), The Role of Major Contractors in the Delivery of Public Services, Memorandum presented to the House of Commons on 12 November 2013. —— (2014) Transforming Government’s Contract Management, Executive Summary, available at www.nao.org.uk/wp-content/uploads/2014/09/Cabinetoffice-cross-government-transforming-governments-contract-managementsummary.pdf. Nicholls, A (2006), Social Entrepreneurship: New Models of Sustainable Social Change (Oxford, Oxford University Press).

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Novkovic, T and Webb, T (eds) (2014) Co-operatives in a Post Growth Era (London, Zed Books). Nussbaum, MC (2011) Creating Capabilities: The Human Development Approach (Cambridge MA, Harvard University Press). Orsi, J (2012), Practicing Law in the Sharing Economy: Helping People Build Cooperatives, Social Enterprise, and Local Sustainable Economies (Chicago, American Bar Association). Osborne, E (2009), The Rise of the Anti-Corporate Movement: Corporations and the People Who Hate Them (Stanford, Stanford University Press). Parker, M, Cheney, G, Fournier, V and Land, C (eds) (2014) The Routledge Companion to Alternative Organization (London, Routledge). Pérotin, V (2016) What do we really know about worker co-operatives?, Co-operatives UK, 2016, available at: www.uk.coop/sites/default/files/uploads/attachments/ worker_co-op_report.pdf. Polanyi, K (2002 (1944)) The Great Transformation: The Political and Economic Origins of Our Time (Boston, Beacon Press). Prakash, R and Tan, P (2014) The Landscape of Social Enterprise in Singapore, Social Entrepreneurship in Asia: Working Paper 2014/1, ASCEP, National University of Singapore. Priede, T, Hilliard, I, López-Cózar Navarro, C (2014) ‘Parallel Paths— A Comparison of CSR Firms and Social Enterprises’ 11(10) Journal of US-China Public Administration 852–61. Restakis, J (2010) Humanizing the Economy: Co-operatives in the Age of Capital (Gabriola Island, New Society Publishers). Ridley-Duff, R (2007) ‘Communitarian Perspectives on Social Enterprise’ 15(2) Corporate Governance: An International Review 382–92. —— (2015) The Case for FairShares: a New Model for Social Enterprise Development and the Strengthening of the Social and Solidarity Economy, Charleston: CreateSpace Independent Publishing Platform, available at: http://shura.shu. ac.uk/10198/. Ridley-Duff, R and Bull, M (2015) Understanding Social Enterprise: Theory & Practice 2nd edn (London, SAGE Publishing). Ruggie, J (2017) ‘Multinationals as Global Institution: Power, Authority and Relative Autonomy, Regulation & Governance, online preview: doi:10.1111/ rego.12154, 1–17. Schneiberg, M, King, M and Smith, T (2008) ‘Social Movements and Organizational Form: Cooperative Alternatives to Corporations in the American Insurance, Dairy, and Grain Industries’ 73(August) American Sociological Review 635–67. Schor, J (2014) ‘Debating the Sharing Economy’, A Great Transition Initiative Essay, October 2014, available at: www.tellus.org/pub/Schor_Debating_the_Sharing_ Economy.pdf. Social Enterprise UK (2012) The Shadow State: A report about outsourcing of public services, available at www.socialenterprise.org.uk/the-shadowstate-a-report-about-outsourcing-of-public-services.

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—— (2013) Out of the Shadows? The Fall and Rise of Social value: a Progress Report, available at: www.socialenterprise.org.uk/Pages/Category/research-reports. —— (2015) State of Social Enterprise Survey 2015, available at: www.socialenterprise. org.uk/Pages/Category/state-of-social-enterprise-reports. —— (2016), Procuring for Good: How the Social Value Act is being used by Local Authorities, available at: www.socialenterprise.org.uk/procuring-for-good. Social Traders (2016) Finding Australia’s Social Enterprise Sector 2016, available at http://cdn.socialtraders.com.au/app/uploads/2016/07/Fases-2016.pdf. Streeck, W (2011) ‘The Democratic Crises of Capitalism’ 71 New Left Review 5–29. Tomlinson, C (2013) ‘The False Alternative of Co-operative Choice under Capitalism’ in R Harrison (ed), People over Capital: The Co-operative Alternative to Capitalism (Oxford, New Internationalist Publications) 2013. Touraine, A (1995) Critique of Modernity (Oxford Basil Blackwell). —— (2002) ‘From Understanding Society to Discovering the Subject’ 2(4) Anthropological Theory 387–98. —— (2007) A New Paradigm for Understanding Today’s World (Bristol, Polity). Wilks, S (2013) The Political Power of the Business Corporation (Cheltenham, Edward Elgar). Wolff, R (2012) Democracy at Work: A Cure for Capitalism (Chicago, Haymarket Books). Yunus, M (2011) Building Social Business: The New Kind of Capitalism that Serves Humanity’s Most Pressing Needs (New York, Public Affairs). Zamagni, S and Zamagni, V (2010) Cooperative Enterprise: Facing the Challenge of Globalisation (Cheltenham, Edward Elgar Publishing).

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Enterprise Diversity

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11 Recognising Facts in Economic Democracy DAVID ERDAL

I.  Theory and Empirical Tests We swim in a sea of concepts, theories and institutions inherited from our forebears. It is a constant battle for us to gain a clear understanding of the extent to which our self-evident truths, our intellectual paradigms, are ideological rather than accurate reflections of empirical evidence (Kuhn, 1962). Our very perceptions are shaped by the theories we hold, and nowhere is this more evident than in the development of economic democracy. In 1978 the neoliberal wing of the Conservative Party geared up for the 1979 election under their unexpected new leader Margaret Thatcher, and Ronald ­Reagan, governor of California, planned his 1980 run for President. Between them they would lead the reshaping of the world’s economy along lines drawn by ­neoliberal economists inspired by Friedrich Hayek and Milton Friedman. In the same year the US General Accounting Office (GAO) started a new series of empirical tests of the economic costs and benefits of legislation favouring ESOPs (Employee Stock Ownership Plans), studies that would lead in a wholly different direction from the neoliberals. Did they enhance productivity, as claimed by the enthusiasts who had convinced Senator Russell Long to include ESOPs in the ERISA pensions bill passed in 1974 (Rosen et al, 2005)? In their large sample of all the companies with ESOPs, employees had acquired on average 8.5 per cent of the equity—a small minority. The largest stake was 58 per cent. The GAO analysed performance for two years before the adoption of the ESOP and three years afterwards, comparing that with matched companies without ESOPs. Nine years later, with the world economy booming—not a situation to encourage a critically reflective approach to the neoliberal orthodoxy—the GAO published their fourth and final study in the series (GAO, 1987). Among the results the GAO highlighted the statistically significant improvement in corporate performance where there was a combination of an ESOP and participative management. ‘We found that the greater the degree of employee

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­ articipation in corporate decision making, the higher the rate of change in our p measure of productivity between the pre-ESOP and post-ESOP periods’ (GAO, 1987: 31). The size of the effect was large: the average productivity increase in the companies combining ownership and participation was 152 per cent of the average in the controls—approximately a three per cent increase instead of two per cent. Dozens of other studies have since reported similar results (see meta-analysis by Kruse and Blasi, 1997; also the evidence to Congress by Kruse in 2002). In light of the evidence, further tax benefits have been granted, and in 2014 the fastest growing sector of ESOPs was companies with 100 per cent employee-ownership (Corey Rosen, NCEO founder, personal communication, 2014). To people aware of the performance of worker cooperatives and employeeowned companies elsewhere, the GAO result was not a surprise. While relatively few academic studies had then been carried out, there were examples across the world of such businesses performing outstandingly well, and for very long periods. In Italy, around the town of Imola, already by the 1920s there was a cluster of successful worker cooperatives, modelled after La Ceramica d’Imola, a workers’ cooperative since 1874 (Lloyd, 1925; Earle, 1986). Imola was still in 2016 a centre of flourishing worker cooperatives. In Germany, in 1891 the optics business now known as Zeiss was transferred into the ownership of its employees through a Stiftung. Its subsequent history has been more challenging than most: two world wars, the business split after the second between East and West Germany, reunited in 1991 after the Berlin wall was torn down, then faced with the need for massive restructuring, productivity improvement and heavy investment in new technology. The Economist magazine, a bastion of neoliberal orthodoxy, published a paean of praise for Zeiss’s performance, taking it as a hopeful metaphor for reunified Germany (Economist, 2000). Only in its final paragraph did it lament the one flaw in Zeiss: the fact that being employee-owned, it was not subject to capital market pressure. Even after the battery of American empirical studies showing that employee ownership tends to strengthen real business performance, the ideological blinkers held sway. In the UK, the John Lewis Partnership (JLP) has, like Zeiss, had since 1929 the misfortune of belonging to its employees. Annual surveys of retail customers have repeatedly placed JLP at or near the top of the ratings by customers (eg Verdict 2014). Through steady organic growth, the group’s sales now exceed those of Marks and Spencer, which has been driven by ‘capital market pressure’ to do such things as distribute £2.3 billion to its shareholders as a defence against the attempted 2004 takeover by Philip Green (eg Warc, 2004). Ever since then Marks and Spencer has languished lower in the league table of retail customer judgement (Independent, 2014). One study by two economists found that John Lewis had the highest productivity of labour in the whole retail industry (which is perhaps not a surprise except to neoliberals); but also that it had the highest capital productivity—something that ought to have alerted at least some economists to ponder this counter-theoretical result, asking how, in the problematic absence of

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capital market discipline, a substantial business had shown over two decades the highest capital productivity in an extremely competitive industry (Bradley and Taylor, 1993). In Spain the worker cooperative network Mondragon consists of over 100 ­successful businesses, each one an independent workers’ cooperative, all started from scratch since the first in 1956, all voluntarily members of the network through which they have created a support system including a bank, two universities, an internal social security system, several research institutes and a large venture capital fund supporting cooperatives. The first academic study in ­English (Gutierrez-Johnson and Whyte, 1977) starts by quoting familiar pessimistic forecasts made for workers’ coops, in this case by Paul Blumberg (1968): Producers’ cooperatives, which do involve workers significantly in management, have repeatedly been proved both economically and socially an inappropriate vehicle for workers’ management. Economically, they have always been plagued with chronic shortages of capital, stemming from their inadequate initial resources, and the hostile milieu in which they operate makes borrowing from the private capital market quite difficult.

The paper then gives a detailed picture of the extent and development of the cooperatives, showing how Mondragon’s system of internal capital accounts and the marshalling of private savings through a credit union, the Caja Laboral Popular, solved the problem of accessible capital. One of the businesses in the Mondragon network, the luxury coach maker Irizar, was later the subject of a Harvard Business School case study for its wonderfully effective team system in manufacturing. The case hardly mentions its democratic structure (Casadesus-Masanell and Mitchell, 2006). Irizar later left the Mondragon group in order to protect its recruitment and training system: the first and largest of the Mondragon businesses, the white goods manufacturer Fagor, much weakened by its acquisition of Brandt, a large French business, had to close; the contract for membership of the network includes the commitment to provide work for members of nearby cooperatives (in this case Fagor) when they would otherwise be made redundant. However, the recruitment system in Irizar is an essential part of the team-working system, and they could not simply take older people in without undermining it, so they chose to leave the network, while remaining a worker cooperative. The acquisition that gave Fagor such problems was of course the kind of step that is a key part of ‘capital market discipline’, in spite of regular studies showing that most acquisitions destroy value (eg Lyddon, 2015). Finally, always potentially visible to theorists, another example of the long term success of businesses owned by its employees is the American retailer Publix. This is the largest employee-owned company in the world, with over 160,000 people working in it, and like the John Lewis Partnership in the UK it is top-rated by its customers. It is also a stellar employer, figuring in the Forbes ‘America’s Best Employers’ list every time that list has been published, coming in seventeenth place in 2016 (Forbes, 2016).

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It is thus clear that there were examples in many countries of long-successful employee-owned companies. However, in 1979, two years after the publication of the Mondragon paper, and as the GAO were in the middle of their empirical study of the facts, Michael Jensen, one of the rising stars in the Chicago school of neoliberal finance-oriented economists, published with William Meckling yet another paper forecasting on a theoretical basis that such a system would never work, being dogged inevitably by insuperable problems (Jensen and Meckling, 1979). First, the businesses could not start up, and they could not grow, because of the impossibility of getting risk capital from outside without giving away control. The empirical evidence of Imola and Mondragon passed them by, although both had been highlighted in detail the previous year in Robert Oakeshott’s The Case for Workers’ Coops (1978). They seem also to have failed to perceive the implications of the fact that most private companies, the major creators of jobs and real growth in any developed economy, do not issue new equity. It is perfectly possible to build substantial businesses without accessing public equity markets. Second, the prediction was that members of employee-owned firms would not allow sufficient retained profit to be invested in the business. Their reasoning was that each member would not benefit from investment beyond his or her personal time horizon, and consequently would veto investments with a longer horizon for financial return. Indeed, the worker owners would choose not to maintain the machines on which they worked, paying the money out to themselves instead. Third, they would not attract good people, because they would distribute cash equally among all members. This would also mean that they would not want to add more workers, since that would entail that they themselves would receive less. Fourth, since each member of such companies holds his or her right to participate as a personal right, not by virtue of a financial instrument, such rights cannot be traded. ‘The existence of a well-organized market in which corporate claims are continuously assessed is perhaps the single most important control mechanism affecting managerial behavior in modern industrial economies’ (Jensen and Meckling, 1979: 485). Lazonick’s work discussed below shows how badly wrong that confident assertion has proved. And finally there would be a control problem, brought about by the fact that disagreements would make decision-making ineffective. It is surprising that they did not notice the institutional design of the corporation, which was invented precisely to solve this potential problem: rather than rehearsing endless discussions, the owners appoint a CEO, allow him or her to be the ultimate decisionmaker, and then periodically the owners call that person to account for the results. This design still applies when the company is owned by its employees—it is simply that the workers and not external shareholders appoint and hold to account the CEO. The large and growing body of empirical studies since then, both of employeeowned companies and worker-cooperatives, has shown every one of these predictions to be mistaken. And yet time and again in the literature-surveys of academic papers ‘Jensen and Meckling (1979)’ is listed without comment.

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II.  It Must be for a Reason Dr Pangloss (Voltaire, 2007 (1759)) figures strongly in the neoliberal paradigm, which sees evidence everywhere that today’s markets and capitalist corporations cannot be improved on. This view has its roots in the observation by Adam Smith that small shopkeepers in the late eighteenth century—a world in which modern corporate and financial power did not exist—provided good service to their fellow citizens, yet were only trying to do the best for themselves. Since the invisible hand that guided them would similarly guide all players in a market to do the general good, the best possible route was to let the market decide. Ergo, conclude the Panglossian neo-liberal economists, since we live in and by markets, this is the best of possible worlds and it cannot be improved on. It follows therefore that there must be a good reason if, as is the case, worker cooperatives and employee-owned businesses make up only a small fraction of each economy, the largest proportion being found in Italy with 5.5 per cent of the economy, against the UK’s two to three per cent (Lampel et al, 2012). According to the theorists that is the right level. Why are there not more of them? Because the market—the infallible invisible hand—has decided. It is worth noting that the invisible hand has in addition vastly increased the rewards of the people who own and run companies (Bebchuk and Fried, 2003); that following the removal of prudent controls on banks during the 1980s and 1990s, this guiding hand took the world economy to the brink of collapse in 2008, necessitating the payment of vast sums of money from taxpayers to bankers; and that the same invisible hand is behind the apparently unstoppable increase everywhere in the gap between rich and poor (Wilkinson and Pickett, 2009; Piketty, 2014). However, to encourage us to keep an open mind on these things, it is also worth noting the conclusion of the Nobel prizewinning economist Joe Stiglitz that the reason why the hand is invisible in all real markets (as opposed to economic models) is because it is not there (Stiglitz, 2008). Entertaining then the possibility that the Panglossian invisible hand may be questioned, let us consider the issue of why there are not more businesses owned and controlled by the people who work in them. In theory, ‘[t]he fact that this system seldom arises out of voluntary arrangements among individuals strongly suggests that codetermination or industrial democracy is less efficient than the alternatives which grow up and survive in a competitive environment’ (Jensen and Meckling, 1979: 473). However, the empirical studies show that such businesses are virtually never less productive than conventional companies, and overall show a significant improvement (Kruse, Freeman and Blasi, 2010). They demonstrate powerful organic growth over long periods of time, and no lack of innovation to perpetuate it. Clearly the barrier does not lie in internal structural problems. I spent some years running a consultancy that advised and helped companies to make the transition into employee ownership. During a period of active search

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for new candidate companies I phoned the family CEO of a significant business owned entirely by his family. After I had finished my pitch he said in a perfectly friendly way: Why would I sell to the employees? The company makes two or three million pounds a year for the family, and the tax regime is encouraging. Why would I do that?

Evolutionary theorists talk about the impossibility of going through a valley to get to a higher peak. Once evolution has produced, for example, a functioning human breathing system, but one that nevertheless has the unfortunate quirk of causing from time to time death by choking, it is impossible for evolution to go backwards and return by a different route that avoids such choking (Dawkins, 1996). Similarly, once the private-company economy is in the hands of people who benefit enormously from the existing structure, then an improvement which involves their giving up these benefits will be resisted strenuously.1 One of the characteristics of economic democracy is that wealth is spread much more widely than it is in the traditionally structured corporate economy. That means that business owners and CEOs will receive less. For those who gain significantly from the current system the answer of the family owner prevails: why would I do that? Many of the individual business owners who do make the choice to sell to the employees are nearing retirement, with no successor. However, many are motivated also by other factors: the appreciation of what the employees have done in building the company, and the concern that a trade buyer would simply want the market share and so close the company itself, throwing the loyal employees onto the scrap-heap. But it is not only wealthy, powerful owners who can easily be persuaded that employee ownership will never work. The people who run investment funds charge significant fees for holding shares for their clients, and for pretending that they can outperform the market by buying and selling shares actively. Actually, on average passive tracker funds, which charge lower fees, outperform the active trading funds, by approximately the differential in their fees and transaction costs, and very few actively traded funds stay above average for any length of time (Blake et al, 2014). If a company becomes employee-owned, its shares will not be traded— there will be no fees to be ‘earned’ from them. The facts that the economy generally would be more productive and wealth spread more widely—which again would generate a stronger economy—are trumped by the direct interests of those who run the current system. Furthermore, some of the largest fees are ‘earned’ by the merchant banks in helping corporate clients acquire or dispose of business units. Once a business is employee-owned, however, it tends to grow organically, recognising the difficulties

1 See also contributions in this volume by Ireland (Chapter [*]), Talbot (Chapter [*]), Villiers (Chapter [*]) and Boeger (Chapter [*]).

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of integrating an acquired company. The decision by Fagor, the original Mondragon worker cooperative, to acquire a substantial French company, assisted in triggering Fagor’s demise. Most democratic companies would prefer, rather than making acquisitions, to reach agreements on cooperation between independent units, as in Mondragon. Again, an important part of the market for merchant banks would shrink. The investment funds, the merchant banks and similar financial institutions are served in their turn by accountants and lawyers. In the same way as democratically structured businesses tend to pay less for their senior managers, they will also be unlikely to pay the levels of fees at play in mergers and acquisitions. Jensen and Meckling’s observation that ‘industrial democracy can only be brought into being by fiat’ (1979: 473) is disproved by examples such as Mondragon and the thousands of US Esops. The outperformance by worker cooperatives and employee-owned companies suggests rather that the incentive structure of those who control and benefit from the existing corporate and financial structures could usefully be examined. It is simply not in their interest to absorb the demonstrated facts, nor to revise their committed theoretical positions. When so much is at stake, it is no wonder that they cling to the non-existent but friendly invisible hand, rather than move to a broader interpretation of what is going on, integrating the empirical evidence of what happens in economic democracy. Even when there is no pecuniary interest at stake, it is hard to move from one intellectual paradigm to another (Kuhn, 1962). How much more so when a whole integrated set of institutions and their opportunist leaders corner huge flows of wealth by sustaining the existing model, explaining away the rising tide of contrary evidence—the destruction of value by acquisitions; the recurrence of bubbles such as the IT boom around the millennium; the plundering of real business value by owners who in theory will have the incentive to build the business (eg BHS in the UK, Enron in the US; Lazonick, 2014); the forced extraction of cash from businesses that are left weakened and underperforming forever, as with Marks and Spencer; the lack of growth in productivity; the ever-expanding gap between rich and poor; and the vast destruction of wealth by the 2008 financial crisis that caused even the powerful high priest of neoliberal laissez-faire, Alan Greenspan, to confess to Congress that he had found a flaw in the basic tenets by which he had lived (Andrews, 2008).

III.  The Allocation of New Wealth A good place to start in seeking a way beyond the flaw is the characterisation of the corporation as a set of resources or assets which are owned. Actually, the ownership of assets is not central to a business: they can be borrowed or leased, and to a great extent they are not physical—Google’s enormous valuation was built on software.

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In its essence the corporation consists of people: regardless of its ownership structure, every business is a set of people cooperating voluntarily to achieve success—to make a living. Assets and money do not make a business successful, although lack of money can precipitate its demise. The people and only the people achieve success for any company. In their nature people cannot be owned; the law does not allow it. It does not allow even voluntary slavery: you are not allowed to sell yourself into slavery, in spite of the sanctity of voluntary contracts freely entered into, because no contract is valid that purports to do something impossible, that is to remove a person’s autonomy and transfer it to a buyer. Autonomy is physically inalienable: no matter how hard you try, you cannot get rid of it and no one can take it from you. The psychologist Viktor Frankl understood that point in an epiphany in the extremes of a Second World War concentration camp. ‘Everything can be taken from a man but one thing: the last of the human freedoms … to choose one’s own way’ (Frankl, 1984 (1959): 75). When a group of people make a living, one of the decisions that has to be made continuously is how to allocate the new wealth they have created. From the original sharing of meat by hunter-gatherers in camp (Erdal and Whiten, 1996), through the forced collection of produce from peasants by feudal lords (Bloch, 2014 (1940)) and the build-up of capital by owners of businesses in the industrial revolution (Allen, 2005), to the extraction of cash from corporations in the modern financialised economy (Lazonick, 2014) this process has to be solved continuously. Lazonick’s analysis of the use of cash by the 449 companies in the S&P 500 index that were publicly listed from 2003 through 2012 is particularly telling. 54 per cent of their earnings—$2.4 trillion—were used to manipulate stock prices through stock buybacks, feeding into the vast sums appropriated in stock by the top management groups. The average income of the top-paid 500 executives was over $30 million in 2012, 83 per cent of which came in the form of stock grants and stock options. A further 37 per cent of corporate earnings were paid out in dividends. That left nine per cent for investing in strengthening and growing the business, something that in theory the stock market system is supposed to encourage (Lazonick, 2014). Theoretical treatments of the allocation of wealth are scarce: it does not form part of the neoliberal analysis, which contents itself with the notion of shareholder primacy (Lazonick, 2014). However, the economist David Ellerman has developed a profound dissection of the issue. He points out that the employment contract—like the imaginary voluntary slavery contract that was the last theoretical resort of the defenders of slavery—purports to transfer the autonomy of the employee to the employer. It is on this basis that when the wealth created by the employees is allocated, none is allowed to the people who create it, the employees. You cannot take away a person’s autonomy but a contract purporting to do just that can take away the wealth that he or she creates, in which that person would otherwise have full rights to participate. Ellerman’s work can be found most accessibly in a blog written for PBS (Public Broadcasting Service)

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(Ellerman, 2015) and most comprehensively in his book Property and Contract in Economics (Ellerman, 1993). One theoretical justification for this appropriation, within the neoliberal paradigm, is that the employment contract gives the employee a fixed, that is risk-free, salary, in exchange for giving up any rights to participate in the management process or in the wealth the employee helps create. In theory the employee voluntarily surrenders his or her autonomy in exchange for the safety of a definite income. However, if a downside risk materialises then the managers’ job is to shift that risk from the ‘owners’ onto the shoulders of the employees—reducing the salary bill by getting rid of people. In its essence and in practice the employment contract is a trick, part of the ideological construct that allows the feudal lords of today to extract wealth from the modern equivalent of the peasantry. Lazonick and Ellerman agree on this, from different perspectives. In Lazonick’s words, ‘workers, whose efforts generate productivity improvements, have claims on profits that are at least as strong as the shareholders’ (2014). Ellerman’s argument is that newly created wealth is in theory allocated to those responsible for creating it, whose responsibility cannot be transferred to anyone else, something that the employment contract purports to do (Ellerman, 1993, 2015, 2016). In the political sphere any such Hobbesian contract, to hand over the autonomy of the citizen to the protective arms of a ruling Leviathan, is also outlawed; instead we have through a great deal of campaigning and often violent struggle settled on the democratic alternative, one in which the autonomy of each individual is acknowledged as primary (Skinner, 2008; Keane, 2009). Each person can choose his or her way, as long as the path chosen is within the law; each person can vote in choosing who gets to be a political leader; each person can access any information, within limits to protect privacy and security; each person can put forward any legally permitted point of view, and can organise groups to do so. It is not surprising that under political democracy, in which each person allows the greatest freedom and respect to all fellow citizens, people have achieved the greatest progress, whether intellectual, artistic, scientific or technological. Individuals who work in an environment of respect and freedom do better in many ways than those who are subject to any form of tyrannical power (Halperin et al, 2004). One of the results of moving to a democratic membership system is that the financial results of the business, whether positive or negative, fall to those responsible, that is, to everyone working in the business. In a conventional company, if business declines then the owners pass the consequences on to the employees by reducing wages and/or making them redundant. However, in a democratic company, in the case of losses it is up to the members together to understand those losses and to decide what to do. Rather than making people redundant, for example, they may reduce salaries for everyone, which can sustain both expertise and capacity. Subsequently, if the business environment improves they can respond more effectively to new growth. There is good statistical evidence that worker cooperatives and employee-owned businesses do in fact sustain jobs better

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through recession (Blair et al, 1998; Fakhfakh et al, 2009). To the neoliberal economist, that is dangerous inflexibility, giving shareholders a lower return in the short term; but if the project is to build long term a sustainable economy in human as well as financial terms, it looks healthy. The human response to an open and respectful environment is at the root of the success of businesses owned and controlled by the people who do the work. This chapter will now look in more detail at one highly successful example of how such a corporate constitution is implemented in practice.

IV.  The John Lewis Partnership: Economic Effects of a Democratic Constitution The retail industry is a low-paid industry. In the UK, the John Lewis Partnership, made up of 336 Waitrose food stores and 43 John Lewis department stores, employs around 85,000 people (John Lewis Partnership, 2015). Their constitution is democratic, the shares transferred by John Spedan Lewis in 1929 into a trust for all employees (Cox, 2010). Under this constitution, after the initial probationary three months, the employee is a partner in the business, called a partner and treated as a partner, enjoying the essential democratic rights.

A.  The Right to Information Since 1929 the weekly Gazette has published all letters, even anonymous ones. The only person who can decide not to publish a letter is the Chairman, and such a decision can be made only on exceptional grounds, such as disclosure of confidential information or the use of personally insulting language. Letters omitted are listed in the Gazette, and often summarised. This system makes it clear to all that no information can long be suppressed. The commitment to openness is real.

B.  The Right to Representation There is a three-tier representative structure to pass the opinions of the partners up to the board. At ground level, each department elects a representative to the store committee. Shop floor representatives do not volunteer to run for election; instead, every member of the department is listed automatically on the ballot paper. People who would never have stood for office are elected. The manifest trust from their work colleagues both boosts the confidence of those elected, and gives them a more profound sense of responsibility to collect opinions and speak up at the meetings to reflect those opinions.

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At the top level, the Partnership Council—64 elected representatives—regularly cross examines the operational directors on performance, plans, and any other matter they wish. Twice a year it is the chairman who is questioned in this way. The proceedings of these meetings are published verbatim in the Gazette. If the Partnership Council concludes that the performance of the company chairman is unsatisfactory, then, after a cooling off period, they can sack him. The chairman has therefore the greatest incentive to make sure that everyone understands the strategy and performance, and the reasons and thinking behind any particular decision. As a result serious efforts are made to inform and consult all partners, especially before major decisions are made. There is a further—unique—structural element. ‘Partners’ Counsellors’ feed information directly to a board member with the duty to ensure that the democratic constitution is implemented. This has worked to thoroughly constructive effect: where there is a problem people are often happier talking to the independent counsellor than to someone in authority over them. This allows for early identification of problems and quick resolution, before they have developed into anything serious (Erdal, 2011).

C.  The Right to Share in the Results Crucially, the John Lewis partners all share in any profits created by their work together. The annual bonus has varied over the decades in the range from nothing to three months’ salary. It is paid as the same percentage of salary for each partner in the whole group; the chairman gets more cash than others, but the same percentage of salary. In the macro economy this system has important results. Inside John Lewis this does not address inequality, since each person receives the same percentage bonus. However, in conventional retailers only the senior managers tend to get any form of bonus, which has the effect of increasing inequality. Thus, relative to the employees of other companies, the less senior John Lewis partners are receiving significant quantities of extra wealth. Moreover, there is a smaller gap in pay between top and bottom in John Lewis, as is typical of employee-owned companies and worker coops. This is achieved by paying less at the top. The chairman of John Lewis receives some £1 million per annum. The CEO of Marks and Spencer, a less successful retail company of similar size, receives several times that amount. There is good evidence that high CEO pay demoralises employees (CIPD, 2015).

D.  The Economic Multiplier As well as reducing inequality, the John Lewis bonus produces a stronger economic multiplier in the real economy than do conventional retailers. Since

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the great majority of the 85,000 John Lewis partners, in common with retail employees generally, are not highly paid, they tend to spend the bonus (after paying tax) in the real economy. This gives a very widespread boost to the economy, in all the areas where there is a John Lewis or Waitrose (JLP) store. In contrast, the distribution of profit by Marks and Spencer (M&S) is very different, and has different effects. In total, the sums involved are similar in order of magnitude. Using 2014 figures, JLP sales were about £10.2 billion with some 85,000 partners; M&S £10.3 billion with 81,000 employees. Given the high proportion of part time workers, JLP had fewer people than M&S on a ‘full time equivalent’ basis: 56,000 against 61,000. The JLP bonus amounted in total to £202 million, the M&S dividend to £271 million. We have seen the effects of the JLP bonus: paying tax, reducing inequality and strengthening local economies. The somewhat larger M&S dividend, however, was different. It was paid overwhelmingly to financial institutions. Many of them had effective means of avoiding paying tax. Moreover, financial institutions charge fees for handling cash, resulting in significant transaction costs. These fees eventually find their ways into the pockets of the people who run the financial institutions and who are generally already very well off. If anything, this will have increased inequality. The capital sum remaining will then not have been spent in the real economy, but held in various financial instruments in the institutions. A proportion will have ended up in derivative instruments or rapid-trading gambling by hedge funds and the like. This is the sort of activity that makes a few people extremely rich, and led in 2008 to the near collapse of the world economy. It has not yet been effectively addressed by the City authorities. Thus in contrast to JLP bonuses, which give a gentle and widespread stimulation to the real economy, dividends paid by quoted companies contribute to the potential instability of the financial system. Writ large—if a significant proportion of our corporations followed the John Lewis model—these consequences would have highly significant results: increasing tax payment, spreading wealth and stimulating the economy.

E. Productivity There would also be an increase in productivity—the key to prosperity. There is overwhelming evidence that employee-owned companies and worker cooperatives are more productive, and grow productivity faster, than their conventionally structured equivalent businesses. Most of the studies have been done in the USA, and over time the methods have been refined. The meta-analysis of 32 studies by Douglas Kruse and Joseph Blasi (1997) confirmed significant improvements in productivity. Not all of the ESOP companies are democratic, and many have only minority employee stakes, so this result is particularly striking. It points to the fact that the ownership stake is one important aspect of a broader, deeper aspect of human relationships: our reaction to how we are treated. Simply giving people

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a share of the ownership has little or no effect: it is when the spread of ownership is combined with participative management that the productivity takes off (GAO, 1987).

F.  The Treatment of People In the conventional employment situation, the corporation is structured as a topdown hierarchy, with little or no feedback possible. It can be dangerous to career prospects to voice critical comments. Those who are ambitious have to be as sensitively aware of the views of those above them as if they were courtiers under a feudal monarch. The majority of people, working on the front line, simply do not figure in the top-down, upward-facing hierarchy. This is not a healthy way for human beings to live. The work of Marmot and others in the Whitehall Studies identified—against the expectations with which the huge studies were started—that other things being equal there is a hierarchy effect on mortality: the lower you stand in the hierarchy, the earlier you die. For example, grade one civil servants live longer than grade two civil servants. Since both are highly educated and very well paid, this is not a class difference, and it was shown statistically to be independent of another effect; within each level in the hierarchy there is a control effect: the more sense of control you have over your work, the longer you live (eg Marmot, 1991). In a corporate hierarchy, the people at the bottom are not acknowledged as what they are: independent and potentially creative individuals cooperating voluntarily. The myth of selling labour holds sway to pernicious effect. They are just employees. Their opinions don’t count. They are paid as little as possible out of the wealth they help create. And they are expendable. If a manager approaches an employee with a request, the employee knows all this. He or she also knows that the manager’s purpose does not include serving the interests of the employee— except in the case of exceptional individual managers, the manager does not care about the interests of the employee. If this employee raises objections it is quite possible to replace him or her. The only brake on the open exhibition of power is the potential cost of recruiting and training someone new, or at worst some form of industrial action.

G.  Community Effects Marmot would predict that a person at the bottom of the hierarchy, with no control over his work, would be likely to die early. In three broadly equivalent towns in Northern Italy I set out to test the theory that working in a democratic business would have positive effects on social and health measures in the wider community (Erdal, 2014). In one, the cooperative town, 26 per cent of all employed worked in a worker cooperative; in another the rate of cooperative employment was

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13 per cent; and in the third there were no worker cooperatives. A survey confirmed that the high-coop town was significantly more positive than the town with no coops. There was a much smaller gap between rich and poor; the local authorities were more positively favoured; supportive social networks were larger; children played less truant; people carried on learning throughout life; domestic violence was less prevalent; they gave blood to a greater extent, and most strikingly on average the population lived significantly longer, a result explained primarily by a reduction in cardiovascular problems (Erdal, 2014). They were living a less stressed and more socially positive life. It is impossible to prove that this was because of the cooperatives, but that must be a candidate hypothesis. It was because the cooperatives were there that the prediction was made, and its confirmation is a point in favour.

H.  Human Nature Behavioural economics has established that people do not react as the caricature of ‘rational man’ that lies at the root of mainstream economics. The ultimatum game has shown cross-culturally that most people will not accept an unfair bargain, even if they would gain substantially by doing so (Cameron, 1999). The ultimatum game and the empirical experience of democratically structured companies pose a challenge to the conventional model. Several features of life as hunter-gatherers share striking similarities with democratic companies (Erdal and Whiten, 1996; Boehm, 1999). The hunter-gatherer band is the social environment in which we evolved to be Homo sapiens sapiens, and therefore the one to which we are tuned by evolution. Among hunter-­ gatherers, first, there is characteristically full recognition of the autonomy of every adult, male or female. Second, the voice of every member of the band is listened to by the other members. Third, there are no recognised leadership positions: leadership is situational, and the person whose suggestions are followed today will often not be the person followed tomorrow. Leadership in any situation comes down to being listened to; it is not a form of dominance. The whole dominance spectrum, so evident in our nearest relatives the chimpanzees and gorillas, is absent. This is because travellers and anthropologists have identified a ubiquitous response to attempted dominance: active counter-dominance. Starting with ridicule, escalating through disagreement to ignoring the would-be dominant individual, the band may end by walking away or excluding a person attempting to dominate. In extreme cases, where the attempted dominance becomes violent, hunter-gatherers may kill the individual concerned (Lee, 1979; Boehm, 1999). It seems likely that this behaviour in the distant past, as far back as a million years ago or more, enabled egalitarian meat-sharing to be sustained against all the temptations it presented for cheating, stealing and appropriating through dominance. Individuals in groups that succeeded in sustaining sharing will have

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­ ourished better than those in groups where the battle for dominance prevailed fl in the manner of chimpanzees and gorillas. (For a more extended discussion see Erdal and Whiten, 1996 and Whiten and Erdal, 2012.) This suggests that at the root of our evolved nature is a complex socially-tuned set of responses built around autonomy, recognition, the ability to decide on who gets to lead in any situation and a powerful reaction against arrogance. An egalitarian social environment is natural to us at a deep level. However, with the invention of agriculture and the surpluses created by it, the social environment changed and it became impossible to counteract dominance effectively. Egalitarianism gave way for thousands of years to hierarchy, kingship and the enforced labour and poverty of the majority. While modern democracy has begun to reassert something closer to the egalitarianism of our huntergatherer past, nonetheless when we go to work we are thrust back into the more ape-like conditions of hierarchy and dominance. Tricks like the employment contract remove the democratic rights altogether: we have no right to participate except as instructed by the dominant hierarchy; we have no influence on decisions nor on who takes the decisions; and far from receiving a fair share of the wealth we create, we see it removed and passed to the ‘owners’.

V. Conclusion This chapter has contrasted neoliberal predictions of the behaviour of democratic businesses with empirical evidence showing these predictions to be entirely false. Democratic businesses flourish better than conventionally structured businesses, even in a relatively hostile intellectual and financial environment. The fact that they remain only a small percentage of the economy is at least partly because it is not in the interests of the powerful beneficiaries from the current system to recognise the facts and rethink the theories. While the ongoing growth of such companies will provide ever more evidence, it will take political action to resolve this situation. The constitution of businesses needs to be recast as membership or partnership for all who do the work.2 Capital should be rewarded not with political control over the people who create the wealth, but with contractual terms enforceable only if they are not met. It is quite possible to reward innovative entrepreneurial success handsomely, without turning the corporation into a dictatorship. And based on good empirical evidence it is possible to predict a future in which economies are increasingly productive and vigorous, wealth is spread widely, and the health and happiness of the population are significantly improved.

2 

See also Ridley-Duff, Chapter 16 in this volume.

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References Allen, R (2005) ‘Capital Accumulation, Technological Change and the Distribution of Income during the British Industrial Revolution’ Discussion Paper Series 239 (Oxford, Department of Economics) www.economics.ox.ac.uk/Departmentof-Economics-Discussion-Paper-Series/capital-accumulation-technologicalchange-and-the-distribution-of-income-during-the-british-industrialrevolution. Andrews, E (2008) ‘Greenspan concedes error on regulation’ New York Times (23 September). BBC (1999) news.bbc.co.uk/1/hi/business/the_company_file/451620.stm. Bebchuk, L and Fried, J (2003) ‘Executive Compensation as an Agency Problem’ Berkeley Program in Law and Economics Working Paper Series escholarship.org/ uc/item/81q3136r. Blair, M, Kruse, D and Blasi, J (1998) ‘Employee Ownership: An Unstable Form or a Stabilizing Force?’ Georgetown University: Business, Economics and Regulatory Policy Working Paper No 142146, papers.ssrn.com/abstract=142146. Blake, D, Caulfield, T, Ioannidis, C and Tonks, I (2014) ‘New Evidence on Mutual Fund Performance: a Comparison of Alternative Bootstrap Methods’ (London, Cass Knowledge) www.cassknowledge.co.uk/sites/default/files/ article-attachments/a-comparison-of-alternative-bootstrap-methods.pdf. Bloch, M (2014 (1940)) Feudal Society (London, Routledge). Blumberg, P (1968) Industrial Democracy: the Sociology of Participation (New York, Schocken). Boehm, C (1999) Hierarchy in the forest (Cambridge MA, Harvard University Press). Bradley, K and Taylor, S (1993) Business Performance in the Retail Sector (Oxford, Clarendon Press). Cameron, L (1999) ‘Raising the Stakes in the Ultimatum Game: Experimental Evidence from Indonesia’ 37 Economic Inquiry 47–59. Casadesus-Masanell, R and Mitchell, J (2006) Irizar in 2005 (Cambridge MA, Harvard Business School) Case 706-424. CIPD (2015) The View From Below (London, CIPD). Cox, P (2010) Spedan’s Partnership: the Story of John Lewis and Waitrose (London, Labatie Books). Dawkins, R (1996) Climbing Mount Improbable (London, Norton). Earle, J (1986) The Italian Cooperative Movement (London, Allen and Unwin). Ellerman, D (1989) The Democratic Worker-owned Firm: a New Model for the East and West (Winchester MA, Unwin Hyman) downloadable from www.ellerman. org/the-democratic-worker-owned-firm/. —— (1993) Property and Contract in Economics (Oxford, Blackwell) downloadable from www.ellerman.org/property-and-contract/.

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—— (2015) ‘The Case for Employee-Owned Companies’ PBS Newshour (20 November) www.pbs.org/newshour/making-sense/column-the-case-foremployee-owned-companies/. —— (2016) ‘The Labor Theory of Property and Marginal Productivity Theory’ 5(1) Economic Thought 19–36, downloadable from www.ellerman.org/ wp-content/uploads/2016/04/ET-LabourTheoryOfProperty-reprint.pdf. Erdal, D (2011) Beyond the Corporation: Humanity Working (London, Bodley Head). —— (2014) ‘Employee Ownership and Health: an Initial Study’ in S Novkovic and T Webb (eds), Co-operatives in a Post-growth Era: Creating Co-operative Economics (London, Zed Books). Erdal, D and Whiten, A (1996) ‘Egalitarianism and Machiavellian Intelligence in Human Evolution’ in P Mellars and K Gibson (eds) Modelling the Ancient Human Mind (Cambridge, McDonald Institute for Archaeological Research) 139–50 www.researchgate.net/publication/273292486_Egalitarianism_and_ Machiavellian_Intelligence_in_Human_Evolution. Fakhfakh, F, Gago, M and Pérotin, V (2012) ‘Productivity, Capital and Labor in Labor-Managed and Conventional Firms: an Investigation of French Data’ 65 Industrial & Labour Relations Review 847–79. Forbes (2016) ‘America’s Best Employers, 2016 Ranking’ Forbes www.forbes.com/ best-employers/list/#tab:rank. Frankl, V (1984 (1959)) Man’s Search for Meaning (London, Simon and Schuster). GAO (1987) Employee Stock Ownership Plans: little evidence of effects on corporate performance (Washington, GAO) www.gao.gov/assets/150/145909.pdf. Goyder, G (1987) The Just Enterprise (London, André Deutsch). Gutierrez-Johnson, A and Foote Whyte, W (1977) ‘The Mondragon System of Worker Production Cooperatives’ 31 Industrial Labor Relations Review 18–30. Halperin, M, Siegle, J and Weinstein, M (2004) The Democracy Advantage (London, Routledge). Independent (2014) ‘Ten Years Ago Philip Green Walked Away From His Bid For M&S’ (20 May) www.independent.co.uk/news/business/comment/ten-yearsago-philip-green-walked-away-from-his-bid-for-ms-and-its-been-goingbackwards-ever-since-9406685.html. Jensen, M and Meckling, W (1979) ‘Rights and Production Functions: an Application to Labor Managed Firms and Codetermination’ 32 Journal of Business 469–506. John Lewis Partnership (2015) John Lewis Partnership plc, Annual Report and Accounts 2015 www.johnlewispartnership.co.uk/financials/financial-reports/ annual-reports.html. Keane, J (2009) The Life and Death of Democracy (London, Simon and Schuster). Kruse, D (2002) Research Evidence on Prevalence and Effects of Employee Ownership: Testimony before the Subcommittee on Employer-Employee Relations, Committee on Education and the Workforce, U.S. House of Representatives, February 13 www. nceo.org/articles/research-prevalence-effects-employee-ownership.

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Kruse, D, and Blasi, J (1997) ‘Employee Ownership, Employee Attitudes, and Firm Performance: A Review of the Evidence’ in D Lewin, D Mitchell and M Zaidi (eds), The Human Resources Management Handbook Part 1 (Greenwich CT, JAI Press). Kruse, D, Freeman, R and Blasi, J (2010) Shared Capitalism and Work: Employee Ownership, Profit and Gain Sharing, and Broad-based Stock Options (Chicago, University of Chicago Press). Kuhn, T (1962) The Structure of Scientific Revolutions (Chicago, University of Chicago Press). Lampel, J, Bhalla, A and Jha, P (2012) ‘The Employee-Owned Business Model During Growth and Adversity: How Well does it Hold Up?’ (July–August) European Business Review 20–23. Lazonick, W (2014) ‘Profits Without Prosperity’ Harvard Business Review (Watertown MA, Harvard Business Publishing). Lee, RB (1979) The !Kung San: Men, Women and Work in a Foraging Society (Cambridge, Cambridge University Press). Lloyd, EA (1925) The Co-operative Movement in Italy with Special Reference to Agriculture, Labour and Production (London, Allen and Unwin). Lyddon, A (2015) ‘Merger mystery—If one M&A deal will often destroy value, why would businesses rack up 20?’ The Value Perspective Blog (London, Schroders) www.schroders.com/en/uk/the-value-perspective/blog/all-blogs/ merger-mystery/. Marmot, MG (1991) ‘Health Inequalities among British Civil Servants: the Whitehall II Study’ 337 Lancet 1387–93. Mondragon (2015) Annual Report 2014 www.mondragon-corporation.com/eng/ about-us/economic-and-financial-indicators/annual-report/. —— (2014) Annual Report 2013 www.mondragon-corporation.com/wp-content/ themes/mondragon/docs/eng/annual-report-2013.pdf. NCEO (National Center for Employee Ownership) (2016) www.nceo.org/articles/ esops-s-corporations. Nuttall, G (2012) Sharing Success: the Nuttall Review of Employee Ownership (London, Her Majesty’s Government Printers) www.gov.uk/government/ uploads/system/uploads/attachment_data/file/31706/12-933-sharing-successnuttall-review-employee-ownership.pdf. Oakeshott, R (1978) The Case for Workers’ Co-ops (London, Macmillan). Piketty, T (2014) Capital in the Twenty First Century (Cambridge MA. Harvard University Press). Rosen, C, Case, J and Staubus, M (2005) Equity: Why Employee Ownership is Good for Business (Watertown MA, Harvard Business Press). Skinner, Q (2008) Hobbes and Republican Liberty (Cambridge, Cambridge University Press). Stiglitz, J (2008) Presentation to the Congreso Internacional CIRIEC Sept www. congresociriec.es/en.

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Verdict Retail (2014) ‘John Lewis Retains Title of UK’s Best Retailer’ www. verdictretail.com/john-lewis-retains-title-of-the-uks-best-retailer/. Voltaire, J-M (2007 (1759)) Candide (London, Penguin). Warc (2004) www.warc.com/Content/News/N16426_Troubled_M26S_Offers_ Buyback_Plans2c_Tesco_Profits_Soar.content?PUB=Warc%20News&CID= N16426&ID=5c970e1e-8866-4eb4-ba4b-91ff970a547e&q=Marks+and+Spenc er&qr. Whiten, A and Erdal, D (2012) ‘The Human Socio-cognitive Niche and its Evolutionary Origins’ 367 Philosophical Transactions of the Royal Society B 2119–29. Wilkinson, R and Pickett, K (2009) The Spirit Level (London, Allen Lane).

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12 Can Reduced Shareholder Power Enable Corporate Stakeholder Accountability? The Case of Triodos Bank STUART COOPER

I. Introduction Social responsibility and sustainability reporting is now ‘standard practice’ amongst the world’s largest companies (KPMG, 2015). Academic evidence, ­however, suggests that the quality of this corporate reporting remains low as it fails to provide a sufficiently balanced and complete account of corporate activities and impacts (see for instance Adams, 2004; Boiral, 2013; Campbell, 2000). Rather, there is growing evidence that such reports, as opposed to enhancing accountability, are primarily used to provide legitimacy (Deegan, 2002; De Villiers and van Staden, 2006; O’Donovan, 2002) or manage the impressions of the organisation’s stakeholders (Adams, 2004; Kent and Zunker, 2013; Neu et al, 1998). As Boiral (2013: 1036–37) neatly summarises: The optimistic rhetoric used in these reports, the questionable reliability of the disclosed information, and the control of that information by senior management undermine transparency and have been widely criticized.

The vast majority of these types of studies have focussed upon the sustainability reporting of large multinational companies with a stock exchange listing. These companies are expected to prioritise the needs of the providers of financial capital for decision-useful information rather than a broader stakeholder accountability. Cooper and Owen (2007: 664) conclude that it ‘is quite impossible to envisage stakeholder accountability being established in a situation where company directors acknowledge enforceable duties only to shareholders’. The aim of this chapter, however, is to explore reporting, accountability and transparency in a different setting. As such a case study of Triodos Bank (TB), which does not have a stock exchange listing, became a Certified B Corporation in 2015 and has unusual

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share ownership and governance arrangements, is the empirical setting for this chapter. This type of alternative setting may be informative given that O’Dwyer and Unerman (2016: 38) suggest that ‘the more innovative and productive examples of accounting for social sustainability may also well be emerging elsewhere than in listed company contexts …’. This chapter seeks to contribute to the debate on corporate stakeholder accountability. It draws upon key literature that theorises corporate stakeholder accountability as consisting of ‘three critical components’: ‘clarity of relationship’; ‘transparency’; and ‘power of accountees’ (Tello et al, 2016). This chapter argues, however, that for corporate stakeholder accountability to be realised transparency must enable evaluation, and ‘productive’ discussions with stakeholders (see Roberts, 1996) must ‘converge on a conclusion or course of action’ (Senge, 1990: 247). It is further contended that the primary obstacle to corporate stakeholder accountability is the power differentials that exist in stakeholder relationships. It is argued in this chapter that the case study organisation’s unusual share ownership and governance arrangements are such that the power differentials are reduced and the consequences of this for TB’s stakeholder accountability are examined. The remainder of this chapter is structured as follows. Following this introduction the next section further discusses the theorisation of corporate stakeholder accountability. Then more details of the case study organisation are provided and the research methods are explained. This is followed by the findings from the case study which are discussed in light of the theorised corporate stakeholder accountability. Finally, the chapter concludes by considering the importance of the valuesbased nature of the case organisation, the potential lessons for enhanced corporate stakeholder accountability and articulates some avenues for future research.

II.  Theorising Corporate Stakeholder Accountability Tello et al (2016) provide an extension of Gray et al’s (1996) model of accountability. There are three key elements to this model. First, there is a socially defined relationship between the ‘accountor’ (the provider of the account) and the ‘accountee’ (the account’s recipient). To whom an organisation is accountable remains one of the key questions that underpins accountability (Fowler and Cordery, 2015). Opinions differ as to which relationships require accountability. In the corporate setting, Benston (1982: 88) suggested that three possibilities are ­‘shareholders, stakeholders and society in general’. A narrow, neoclassical economic, view of accountability has been argued to suggest that only financial accountability to shareholders should be required (Benston, 1982; Sternberg, 2004; Watts and Zimmerman, 1986). Such a view is predicated on the assumption of an efficient market for goods and services as well as for information. An alternative, much broader, view is that organisations should be accountable to all stakeholders that are affected by their activities (Unerman and Bennett, 2004). If we conceive the

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scope of possible accountability relationships as a continuum from being due only to shareholders to a very broad scope of all affected stakeholders, then an intermediate position is where some, but not all, stakeholders have rights to accountability. Stakeholders may be argued to be due accountability if they have salience (Mitchell et al, 1997) or power or influence (Bailey et al, 2000; Roberts, 1992; Unerman and O’Dwyer, 2006). Unerman and O’Dwyer (2006) suggest that the identification of stakeholders is an essential part of relational accountability. The second key element of the Gray et al (1996) model is that the accountee requires the accountor to provide information as to how they have acted. Tello et al (2016: 15) argue that it is the nature of the accountor-accountee relationship that ‘enables rights to information and consequently directs the provision of information from accountors to accountees.’ They continue that the transparency of the information provided is of importance if accountability is to be achieved (see also Shaoul et al, 2012). Transparency, it is argued, provides visibility, enables evaluation and has the potential to enhance responsibility. For such potential to be realised, however, the information is required to be of sufficient quality (Tello et al, 2016). There are alternative views on what constitutes good quality information. The IASB’s (2010) conceptual framework suggests that the fundamental qualitative characteristics of useful financial information are relevance and faithful representation and that this is enhanced where the information provided is comparable, understandable, verifiable and timely. In contrast, the Global Reporting Initiative (GRI, G4) suggest that the principles underpinning the quality of sustainability reporting are: balance, comparability, accuracy, timeliness, clarity and reliability. The third and final element are the instructions that the accountee gives with regard to their expectations of the accountor’s actions. Part of this element is the recognition that the accountee will have ‘power over resources’ such that they can reward or sanction the accountor. Tello et al (2016) suggest that this element requires the accountee to be able to assess and evaluate the accountor’s activities and performance. Where the assessment is positive the accountee will reward the accountor with greater resources, whereas when this is not the case then the accountor will be sanctioned. Tello et al (2016) rename this element the ‘power of accountees’, as they suggest that stakeholder power to create change and to influence decision-making is essential. Tello et al (2016) suggest that their extended model enables accountability to be evaluated through a consideration of the clarity of relationship, the power of accountees and the transparency of information. It is the second of these, the power of accountees, which is the most problematic for accountability. Tello et al (2016) suggest that such ‘power is important due to its capacity to create change’, but it is important to consider, given existing legal frameworks and codes of best practice, how such power is distributed between the corporation and its stakeholders. There is an implication that it is only powerful stakeholders, who can influence decision-making and can create change, which are due accountability. From this standpoint, however, we seem to return to the conception that

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a­ ccountability is only due to the most powerful stakeholders, namely shareholders. If powerful stakeholders, for instance shareholders, have control and influence over the decision-making process, then other stakeholders cannot do so. As such more powerful stakeholders can use their power to impose their will on others (Roberts, 1996). This would suggest that current arrangements requiring companies to provide financial accounts to shareholders achieves accountability, but Cooper and Owen (2007) conclude that such power differentials prevent accountability. A further, problematic, implication of such power differentials is that corporations are not accountable to their less powerful, more vulnerable stakeholders. Accountability, however, cannot be completely divorced from ethical concerns and fairness (Parker and Gould, 1999). Brown (2013) persuasively argues that corporations have an ethical responsibility to less powerful, more vulnerable stakeholders. If it is accepted that market inefficiencies exist, then there is a danger that corporations will favour powerful stakeholders, for instance shareholders by increasing profitability, at the expense of those less powerful. Brown (2013) likens such actions to ‘cheating’ and suggests that it is of ethical importance to be able to consider how corporate activities impact upon these groups. This suggests that transparent, good quality information is also required where the corporation has a relationship with a more vulnerable, less powerful stakeholder group. For accountability to be realised it is not sufficient for accountors to provide transparent and good quality information to accountees. Drawing on insights from the broader social sciences (in particular Rorty, 1989; Habermas, 1992; Senge, 1990), Cooper and Owen (2007) argue that ‘communicative action’ (Habermas, 1984) is a requirement for enhanced accountability. It is also necessary for stakeholders to be able to enter into a discussion with a corporation’s management and other stakeholders. Moreover, drawing upon Habermas’ (1992) framework for an ‘Ideal speech situation’, it is necessary that within the discussion stakeholders are free to state their position and to question and challenge the position presented by other participants (Bradbent et al, 1996). Unerman and Bennett (2004: 691) argue that, when applied to corporations, the outcome should be ‘the acceptance by all stakeholders of a democratically determined consensus view of corporate responsibilities’. Similarly, Senge (1990: 247) argues that decisions should result from a discussion whereby an analysis of the alternative views ‘converge on a conclusion or course of action.’ From this perspective, therefore, an essential component of corporate accountability is the ability for stakeholders to enter into discussions and to influence decisions. Roberts (1996) argues, however, that the presence of hierarchical power destroys the possibility of such accountability. If managers or a particular stakeholder group are, through the discussion process, able to impose their interests on others, then ‘communicative action’ is not possible. The existence of such hierarchical power would effectively negate the rights of the other stakeholders and prevent accountability. In other words, the primary obstacle to stakeholder

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accountability is the existing power differentials in stakeholder relationships. This recognises that the power of the corporation, its management and its ­stakeholders is highly relevant to considerations of accountability. In this light, the provision of information is not sufficient to enable accountability if the accountee does not have the opportunity and ability to use it to influence corporate activities. An essential element of accountability, therefore, is that stakeholders are able to enter into and influence discussions. As earlier argued, accountability should not only be afforded to the powerful stakeholders. For Roberts (2003) what is needed is an ‘extra-corporeal accountability’, whereby the more vulnerable, less powerful stakeholders are also included. It would be remiss not to acknowledge here that accountability is a ‘contrary concept’ (Jacobs and Walker, 2004; Roberts, 1991) that remains difficult to define and ‘is dependent on the ideologies, motifs and language of our times’ (Sinclair, 1995: 221). It is also important to note that whilst this chapter argues for enhanced stakeholder accountability this is itself not uncontentious. Accountability has been argued to have negative consequences, such as hindering entrepreneurial and innovative behaviour, and is costly (Christensen and Laegreid, 2015). Similarly, Messner (2009: 918) argues that ever increasing accountability could go to such extents that it becomes ‘ethically problematic for the person or organization that is expected to give an account’. Whilst acknowledging these ‘limits to accountability’ (Messner, 2009), this chapter argues that there remains a need for enhanced corporate stakeholder accountability not least because it is ‘a crucial tool for limiting unconstrained power’ (Rubenstein, 2007: 631). Such a broader corporate stakeholder accountability recognises the impacts that a corporation has on their less powerful stakeholders. This chapter also argues that transparent and good quality information is not sufficient, as for enhanced accountability there is also a need for corporations to enter into discussions with their stakeholders. Within these discussions weaker, more vulnerable stakeholders must be empowered such that they have the opportunity to reach an understanding and influence corporate activities. This chapter argues that power differentials in corporation-stakeholder relationships impact upon two key elements of accountability, namely the transparency of the information provided to, and the level of discussion with, stakeholder groups.

III.  Research Methods This chapter explores these issues through a case study of Triodos Bank (TB), which purports to be a ‘global pioneer of sustainable banking’ (www.triodos. co.uk/en/about-triodos/who-we-are/). TB’s Articles of Association state that the people who established TB were inspired by the ‘anthroposophical movement and the movement for religious renewal, the Foundation Christian Community’ and

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that the principles of this movement continue to inform their work. Concern for quality of life, human dignity, the environment and sustainable development are at the core of the organisation and this is reflected in their mission as quoted in their annual report (2015: 7): —— to help create a society that promotes people’s quality of life and that has human dignity at its core —— to enable individuals, institutions and businesses to use money more c­ onsciously in ways that benefit people and the environment, and promote sustainable development —— to offer customers sustainable financial products and high quality service.

TB claim to take a ‘uniquely sustainable approach’ due to its ‘sustainable business model’; only lending ‘to people and organisations working to make the world a better place’; and ‘total transparency’ (www.triodos.com/en/about-triodos-bank/ who-we-are/mission-principles/why-we-are-different/). This is further reflected in TB’s business principles, which include considering ‘the social, environmental and financial impacts of all that we do’ and being ‘accountable, responsible and committed to our stakeholders for all our actions’. TB, therefore, makes strong claims for accountability and ‘total transparency’ that are relevant to the interests of this chapter. TB was selected as the single case study for this chapter as it represents an ‘extreme or unique case’ (Yin, 1994: 39). What makes the case of TB extreme if not unique (to the author’s knowledge) is that its mission and business principles are protected by unusual share ownership and governance arrangements (as explained on their website: www.triodos.com/en/about-triodos-bank/who-we-are/organisation/). All shares of TB ‘are held in trust’ (by an independent foundation— Stichting Administratiekantoor Aandelen Triodos Bank (SAAT)) so that it can protect its mission and identity. SAAT holds the shares of TB and ‘then issues depository receipts for Triodos Bank shares to the public and to institutions’. This arrangement is such that it is SAAT, and not the depository receipt holders, that exercise the voting rights for TB’s shares and ‘SAAT’s Board of Management’s voting decisions are guided by the Bank’s ethical goals and mission, its business interests, and the interests of the depository receipt holders’. These unusual arrangements are more fully explained in Triodos Bank’s 2011 Annual Report (120): Depository receipt holders benefit from the economic rights associated with these shares, such as the right to dividends, but do not exercise any control related to them. Control rights are vested in the SAAT which exercises the voting right attached to the shares.

It is also worth noting that TB’s shares are not listed on any stock exchange and that TB ‘maintains its own platform for trading in depository receipts’ (Annual Report, 2015: 39–40). In their 2008 Annual Report (see page 9) TB’s Board of Management discuss at length their concerns with the consequences of a stock exchange listing for banks. This discussion identifies the tension between the need for listed

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banks to maximise shareholder value in the short-term with a l­onger-term social contribution. They continue at page 9: For unlisted banks, such as the cooperative banks and Triodos Bank, this bias towards shareholder value does not exist. For these banks, customer value and social value are paramount and profit the outcome of sound management.

TB is, therefore, different to many other companies and banks. By not listing on a stock exchange and by having their shares held in trust by SAAT the rights and control normally afforded to company shareholders are reduced. In this case, therefore, it would appear that shareholder power is reduced. Here it is argued that the seeming reduced power differential in these stakeholder relationships appears to offer a greater opportunity for TB to provide enhanced accountability to a broader range of stakeholders. TB identify three groups of stakeholders as follows (Annual Report, 2015: 16): —— Those that engage in an economic relationship with the business (eg customers, depository receipt holders, co-workers and suppliers) —— Those that don’t engage in economic transactions, but who maintain a close interest in Triodos Bank (eg NGOs, governments, the media and the communities who benefit from our finance) from a societal perspective —— Those that provide new insights and knowledge (eg advisors and inspirers), prompting us to reflect, rethink and explore new territory.

As can be seen from the above quotation TB place depository receipt holders alongside customers, co-workers and suppliers, as stakeholders with which there is an economic relationship. It is this group of stakeholders that will be the focus of the analysis and discussion in the remainder of this chapter. The next section will present an analysis of how TB provides accountability to these stakeholders. Following the theorisation of corporate accountability discussed earlier, the analysis will focus upon the level of discussion with, and transparency of the information provided to, the different stakeholders. Whilst the research is exploratory in nature and it is not intended that its findings will be generalisable, its aim is to consider whether there is evidence that accountability has been enabled in this unique case. The data for the analysis in this chapter is primarily drawn from TB’s post financial crisis annual reports (2008–15) and current website. Annual reports provide a robust source of data (Cooper and Slack, 2015; Neimark, 1995) and ‘are intended to be a legitimate and trustworthy medium through which management communicate information’ (Yuthas et al, 2002: 141). Corporate management have control over the content and information disclosed and so annual reports provide a source through which management’s intent can be conveyed (Guthrie and Parker, 1989; Mäkelä and Laine, 2011). Annual reports also provide a consistent source of data such that insights into changes to the information provided can be garnered (Cooper and Slack, 2015). The annual report can be criticised, however, for a lack of timeliness and so this is augmented by an analysis of TB’s current website as this can be argued to provide more up to date information.

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A two-stage approach was adopted for this study. First, a content analysis (Krippendorff, 1980) of the annual reports and website was undertaken. Content ­analysis has long been used in the social and environment accounting literature, but the analysis undertaken has often been quantitative in nature (see Unerman, 2000; and Beck et al, 2010). This study adopted a more qualitative thematic content analysis (Beattie et al, 2004) to identify content of relevance to the stakeholders with an economic relationship with TB. Second, a close reading of all of the thematic material was undertaken. Close reading is a ‘forensic examination (of text) from a variety of perspectives’ (Amernic et al, 2010: vi) that permits a researcher to interrogate textual data (and see Brennan et al, 2009, Cooper and Slack, 2015; Craig and Amernic, 2011). In this case the text was scrutinised for evidence related to transparent information to, and discussion with, customers, depository receipt holders, co-workers and suppliers. There is a significant body of evidence which suggests that managers disclose information in such a way as to present their organisation and themselves in a favourable light (Aerts, 2005; Brennan et al, 2009; Stanton and Stanton, 2002). As such annual report and website disclosures may be used as ‘instruments of impression management’ (Arndt and Bigelow, 2000: 501) whereby readers’ perceptions are managed and potentially manipulated (Dhanani and Connolly, 2012; Samkin and Schneider, 2010). For this reason the analysis has been undertaken from a critical standpoint and so can best be described as a ‘close critical reading’ (Laine, 2005). The findings from this analysis are presented next.

IV.  The Case of Triodos Bank This section first provides evidence relating to the level of discussions with the stakeholders, customers, depository receipt holders, co-workers and suppliers, that TB identify as having an economic relationship with them. It then presents evidence of instances whereby TB provide transparency that is ‘innovative and productive’ (O’Dwyer and Unerman, 2016).

A.  Stakeholder Discussions Within the Annual Reports of TB there is an acknowledgement that ‘dialogue with all stakeholders is an important source of inspiration and new ideas’ (2009 Annual Report: 65). In the 2008 (page 59) and 2009 (page 65) Annual Reports the purpose of the dialogue with these stakeholders is disclosed as being: Dialogue with this group of stakeholders mainly involves weighing up economic interests. Each stakeholder—whether saver, investor, borrower, supplier or co-worker—has

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something to gain or lose in their relationship with the Bank. The balance between long and short-term interests, and self and public interest, forms the basis for dialogue with these stakeholders.

Despite this there is very little information provided with regard to dialogue or discussion with suppliers. In fact there is no mention of any such engagement except in the 2015 Annual Report (page 30) where under the heading of ‘Engaging the supplier community’ it is disclosed that: Triodos Bank’s approach to sustainable procurement is to maintain a dialogue with suppliers to further reduce the use of resources and energy throughout the value chain by, for example, minimising transport by using packaging or products that are by design easy to repair, repurpose, reuse or to biodegrade.

In contrast there is much greater disclosure related to discussions with customers, depository receipt holders and co-workers. For customers there are annual client days which ‘have connected hundreds of customers in all the countries where we work’ (Annual Report, 2014: 13) plus ‘numerous’ meetings throughout the year enabling ‘room for discussions about Triodos Bank’s strategy and policy’ (Annual Report, 2009: 65). It appears that it is only a minority of customers that have taken advantage of these opportunities. Also it is noted in 2015 (page 18) that ‘Client and depository receipt holder meetings delivered in all countries, with more consistent approach across all branches’. The implication is that in the ­earlier years of this study such meetings were not consistent across all branches in all countries. Depository receipt holders are entitled to attend an annual general meeting where they have voting rights, although ‘each one is limited to a maximum of 1,000 votes’ (Annual Report, 2008: 55). There is also common reference within the reports to informal meetings with depository receipt holders across the different countries of operation. The frequency and scope of such informal meetings is not clear, but an annual survey of depository receipt holders is another form of engagement if not discussion. The responses received range from 3,000 to 5,000 per annum, which whilst significant, remains a minority. For instance in 2015 (page 18) it is noted that the results published related to ‘4,500 participants (out of 32,500)’. Co-workers appear to have the opportunity to formally enter discussions most frequently. Every branch holds weekly Monday morning meetings for co-­workers. In 2013 it is noted (page 16) that these weekly meetings ‘provide opportunity for all branches and business units to convene and discuss shared issues’. These meetings and the induction process are also reported as being important means through which co-workers are connected to TB’s mission and values. A co-worker council exists in the Netherlands (and in Spain until 2010) and this provides a ­formal opportunity to enter discussions. For instance in 2009 (page 72) it is reported that the ‘Dutch Works Council was consulted on a number of policy proposals and issues regarding working conditions and mobility, the proposed

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separation of S­ ustainalytics and the change of offices for the Dutch branch including more flexible workplace.’ Such works councils are not a legal requirement in the other countries in which TB operates and so in 2011 (page 18) they note that ‘branch leadership is evaluating the creation of a non official body to represent co-worker interests.’ In addition, each year TB holds a themed annual co-worker conference which is attended by approximately 120 co-workers from ‘across all levels and countries’ (2012, page 19) each year. In 2009 (page 70) it was noted that: Young co-workers in particular were invited to the Co-worker Conference to contribute their vision and energy. The young generation of co-workers are very important for Triodos Bank, providing a fresh look at the organisation and a closer connection with broader social trends. A Young Triodos group organise a variety of activities during the year and are actively involved in finding solutions to some of the issues facing the Bank.

There is evidence, therefore, that TB has actively engaged, at least annually, with its economic stakeholders (with the possible exception of its suppliers). This engagement appears most frequent and comprehensive in terms of co-worker weekly meetings with attendance at other formal fora attended by a minority of stakeholders. This chapter, however, argues that for accountability to be enhanced, stakeholder discussions must enable alternative views to ‘converge on a conclusion or course of action’. For accountability to be enhanced, discussion must be able to influence the decisions made—they must serve a purpose. It is more difficult to clearly identify the extent to which the engagement with the economic stakeholders has been purposive. From the data analysed there are a number of disclosures that refer to how engagement with co-workers and ­depository receipt holders has informed policy. ‘Co-workers are encouraged to contribute to the policy-making process and to feel involved in all the Bank’s activities’ (2008: 59). The issues addressed by the Board of SAAT in these meetings included the ­following: ‘changes to be made to the policies of SAAT and Triodos Bank in response to questions and comments from the depository receipt holders’ (2011: 121). The co-workers are also identified as contributing to the strategic direction of TB. The 2008 Annual Report (page 59) provides information relating to the development of ‘a new strategy for the Bank for the coming three years’. It is reported that the co-workers ‘made a significant contribution to this new three-year plan with the aid of the Theory U change methodology’ (page 129). It is not clear, however, in what specific ways, if any, the final strategy was influenced by the ­specific views of co-workers. Interestingly in 2014 there is even less evidence of (non-­ senior) co-workers’ influence in Triodos 2025, which explored their ‘strategic ­perspective in a number of possible future scenarios’ (2014: 12). In this instance: The project was driven by a team comprising senior co-workers and members of both the Supervisory Board and Board of SAAT. It involved visits, or learning journeys, to numerous companies wrestling with the future in different ways—from an airline to a green energy company.

In 2014, and influenced by developments in the Global Reporting Initiative’s (GRI) sustainability reporting guidelines, TB ‘introduced a formal process ­creating

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an analysis of the issues that are most important both to our stakeholders and ­ourselves’ (page 13). In 2015 (page 16) it was reported that: We will use the results of this stakeholder engagement activity, as well as the examples detailed here, directly in the development of our strategic objectives. The results will also inform our work more generally throughout the year, as a reference for new ideas and the development of existing activity.

Again, there is little information here as to how the different stakeholders are able to influence TB’s strategy and activities. Perhaps this is due to the fact that the issues raised by stakeholders and TB were consistent and this led to the conclusion that ‘the bank and our stakeholders areas of interests are aligned’ (page 16). The first stakeholder issue identified relates to TB’s strategy and mission: ‘The results suggest Triodos Bank’s stakeholders want and expect Triodos to continue to be a leader in sustainable finance, with a strategy that reflects and supports its mission’ (page 16). This support for TB’s mission and values appears to be at the heart of the stakeholder relationships and the following quote from the 2015 Annual Report (page 14), perhaps, puts this most clearly: We have benefited from open discussions with our stakeholders for many years and in varied ways from client days connecting hundreds of customers in all the countries where we work, to depository receipt holder meetings and surveys. But while some organisations ask their stakeholders what they think they should do, and then do it, Triodos Bank takes a different approach. Our starting point, for everything we do, is our essence. It is about who we are and is, therefore, one of our stakeholders. And it is key to our conversations with our stakeholders.

Here the importance of TB’s roots, mission and values are most clearly articulated. Whilst TB does engage in significant stakeholder dialogue, it would seem that it is TB’s ‘essence’ that is primary. In this way the stakeholders (including customers, depository receipt holders and co-workers) are unable to influence TB away from its mission. It was argued earlier that in this case there was a reduced power differential in the stakeholder relationships and that this may enable greater stakeholder accountability, but it appears that hierarchical power remains in place. In this case the power remains with the management, Supervisory Board and Board of SAAT to ensure that TB’s essence remains intact. This is in contrast to listed companies where hierarchical power remains with shareholders and the need to maximise shareholder value. In this case the capital providers, customers and depository receipt holders, have made a ‘conscious decision’ to bank with and invest in an organisation that is ‘values-based’ and given the economic nature of their relationship they could withdraw their stake if this was no longer the case.

B. Transparency In this section, we will look at how TB provides information to enhance its ­transparency. As was noted earlier there remain concerns that transparency is

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potentially undermined by senior management’s control of the reported information (Boiral, 2103). Specific concerns relate to the balance and completeness of corporate reports as senior managers may choose to omit information relating to corporate activities and impacts (Adams, 2004; Boiral, 2013; Campbell, 2000). KPMG (2015) suggest that the GRI is the most popular set of voluntary guidelines for organisations wishing to report on their economic, social and environmental impacts. TB is an organisational stakeholder of GRI and followed these guidelines throughout the period 2008–15. In the years 2008–13, TB followed the GRI’s G3 guidelines and had the highest grade (A), claiming that it had disclosed all core and sector specific indicators or explained the reason for its omission. From 2014, TB was ‘in accordance’ with the ‘comprehensive’ requirements of the more recent GRI G4 guidelines. As such TB are among a minority of organisations producing such comprehensive reports. For instance, according to the GRI database only 433 of the 1,533 reports for 2014 were graded at ‘A’. More than 70 per cent of reports included in the GRI database, therefore, were graded at B, C or were undeclared. Such lower grades require significantly less disclosures and therefore may well be unbalanced and incomplete. All of the five banks listed in the FTSE100 on the 11 November 2016 (Barclays, HSBC, Lloyds, Royal Bank of Scotland and Standard Chartered) are included in the GRI database, but, over the period 2008–15, only one bank (HSBC) for one year (2013) was able to match TB’s GRI grade. There is evidence, therefore, that TB is a relatively transparent bank and this transparency is now explored further by discussing two particular examples. The first relates to a development in 2009 to provide information on who TB lends to. The second concerns the transparency relating to the rewards to and the remuneration of co-workers and Executive Board. As noted above, the essence of TB relates to its mission and values as a sustainable bank. One aspect of this is that TB will: ‘use money more consciously in ways that benefit people and the environment, and promote sustainable development’ (Annual Report, 2015: 7). One of the ways in which TB uses money is by lending it to ‘organisations that bring lasting positive change’. In this way, TB claims to have ‘made an extraordinary and lasting impact on people and the environment across Europe’ (www. triodos.co.uk/en/about-triodos/what-we-do/who-we-lend-to/). This may be ­perceived as a bold claim, but TB provides information on the sectors to which it lends money, its lending criteria and can be supported by an innovative transparency initiative. In 2009 TB: [D]eveloped an online tool that allows visitors to our website to go on a ‘virtual’ trip to see the customers we finance. Launched in the summer of 2009 in The Netherlands followed by the UK later in the year, Mijn Geld Gaat Goed (My Money Goes Well—www. mijngeldgaatgoed.nl) is a simple, but powerful transparency tool which will eventually allow anyone with internet access to ‘visit’ all the projects we lend to across the Triodos Group (2009 Annual Report: 10).

Each loan made by TB can be accessed and, through the website, users can search by sector or location to identify organisations that have received loans.

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I­ nformation on the nature of the loan recipients’ activities are made available as well as links to their website where one is available. The provision of such information on the loans made appears to offer an unusually high level of transparency to TB’s stakeholders. If we now turn to the information provided with regard to remuneration and rewards we can see that in the 2015 Annual Report (page 16) TB stated: Unlike larger mainstream banks, remuneration was once again a relatively low priority for our stakeholders and the bank. This may reflect satisfaction with the prevailing approach to remuneration at Triodos Bank and suggests that its policy is well understood. Triodos Bank does not offer bonuses and has a relatively low difference between the highest and lowest salary, for example.

The transparency of remuneration policy is evident throughout the period analysed. For instance in the 2012 Annual Report (page 78) it is stated: ‘Triodos Bank continues not to offer bonus or share option schemes to either its Board members or co-workers. Financial incentives are not considered an appropriate way to motivate and reward co-workers in a values-based bank.’ Whereas listed banks provide employees with bonuses and share options, TB express concern that such rewards will provide inappropriate incentives. More recently the reports have also provided the ‘factor by which the maximum salary in the lowest scale and the maximum salary for senior management differs’. It is stated that the remuneration system at TB is based on the principle that there is a need ‘to ensure the discrepancy between the highest and lowest remunerated co-workers is not excessive’ (2012: 78) and it is claimed that it is ‘very low compared to other banks’ (2009: 71). It is also acknowledged that this reflects ‘a relatively flat structure across the bank’ and a system that is designed to create ‘fair rewards’ (2009: 72). One result of this is that at ‘more senior levels remuneration is slightly below the market rate’ (2009: 72). This transparency relating to remuneration policy appears to be well received by stakeholders and this is reflected in it being classified as a low priority issue by stakeholders. The GRI G4 guidelines include G4-54 which requires organisations to ‘Report the ratio of the annual total compensation for the organization’s highest-paid individual in each country of significant operations to the median annual total compensation for all employees (excluding the highest-paid individual) in the same country’, but the five FTSE100 banks have chosen not to disclose this and so have not followed TB’s lead on transparency on this issue.

V.  Discussion and Conclusions The previous section provided evidence from a close critical reading of Triodos Banks’ post financial crisis annual reports and current website. There is evidence that TB is relatively transparent and that it has shown innovation in some of the information it provides to its stakeholders. The information provided with regard

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to remuneration and the recipients of loans offers a high level of t­ ransparency that appears valued by stakeholders. TB’s motivation for such transparency, however, does not appear to result from stakeholder discussions, but rather from the values upon which TB is founded. TB identifies these values as a primary stakeholder, as this ‘essence’ is their ‘starting point’ and is ‘key’ to their stakeholder ‘conversations’. There is also evidence that TB undertakes significant levels of stakeholder engagement, although this is less apparent for suppliers. This chapter, however, suggests that an essential feature of corporate accountability is for stakeholders to be able to enter discussions and influence decisions. Moreover, it is argued that such accountability is not possible where hierarchical power is present (Roberts, 1996). If managers or a particular stakeholder group are, through the discussion process, able to impose their interests on others, then ‘communicative action’ is not possible. The evidence provided here is that in this case management have the remit and power to afford primacy to the founding values of TB such that this ‘essence’ dominates stakeholder discussions. In this case therefore it is not possible to conclude that stakeholder accountability has been enhanced. Despite shareholder power being diminished such that the power differentials between stakeholders is reduced, hierarchical power remains. The Board of SAAT has an explicit remit to protect TB’s mission and identity and this guides the decision that they make. In this case the mission and identity relate to issues of social (including human dignity and quality of life) and environmental sustainability and this is TB’s essence. As such TB is an unusual case where an unlisted company with an alternative ownership and governance structure provides an example of innovation in transparency and social and environmental sustainability (see O’Dwyer and Unerman, 2016). The case of TB was chosen because its mission and business principles are protected by unusual share ownership and governance arrangements whereby all shares are ‘held in trust’ by SAAT so that it can protect TB’s mission and identity. These arrangements are such that the depository receipt holders retain the economic rights associated with the shares, but ‘do not exercise any control related to them’. In effect the power of shareholders to require an organisation to prioritise (short-term) shareholder wealth maximisation is reduced, as shareholders alone cannot replace Directors and Board members: ‘The Annual General Meeting of depository receipt holders appoints the members of the Board of SAAT, based on the Board’s recommendations. These recommendations must be approved by Triodos Bank’s Executive Board and Supervisory Board’ (2015: 40). Similarly, the arrangements are such that the shares of TB are not subject to the ‘market for corporate control’. The case of TB does, therefore, demonstrate that it is possible to reduce shareholder power, but, if this is to become more widespread, then the ‘rules of the game’ need to be changed. If shareholders do not have the power to replace members of the Board and senior management, then ‘agency theory’ would suggest there is a danger that senior managers will make decisions for their own benefit. The unusual arrangements at TB are again informative as it

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suggests that a form of supervisory board can play a role in guiding the direction of an organisation. For instance, as we saw earlier SAAT’s ‘Board of Management’s voting decisions are guided by the Bank’s ethical goals and mission, its business interests, and the interests of the depository receipt holders’. A supervisory board could, however, be required to enter discussions with stakeholder groups and be guided by their interests. Moreover, for stakeholder accountability to be achieved such discussions would need to allow the supervisory board to reach a ‘democratically determined consensus view of corporate responsibilities’ whereby no stakeholder group would have the power to enforce its views upon the board. Enabling such a democratic approach to decision making is challenging, but Vinnari and Dillard (2016) argue that Latour’s (2004) due process model and Mouffe’s (2013) agonistics may provide a useful framework for a more democratic form of governance. ­Particularly relevant to the discussion in this chapter are Latour’s consultation and h ­ ierarchy stages. Latour (2004: 110) suggests that it is important that consultation is ‘broad’, ‘includes all the relevant voices’ and ensures ‘that reliable witnesses, assured opinions, credible spokespersons have been summoned up’. The hierarchy stage requires ‘negotiation’ and ‘compromise’ such that the ‘propositions’ raised by the consultation are ranked in order of importance. Within this due process Latour (2004) argues that there is a place on the ‘jury’ for scientists, politicians, economists and moralists. Vinnari and Dillard (2016: 32) suggest that economists ‘identify those with economic interests’ and so in this context can, perhaps, be aligned with a traditional shareholder value approach to business. In contrast, and of particular relevance here, is the role of moralists who, in the consultation stage, defend ‘each concerned person’s right to redefine the problem in its own terms’ (Latour, 2004: 162). They then ‘add a decisive competency, precisely that of arranging them all—however contradictory they may be—in a single ­homogeneous hierarchy’ (ibid: 158) and, finally, they also offer ‘a right of appeal to excluded parties’ (ibid: 162). The role of such ‘moralists’ entails ‘specifying and monitoring rights and objectives, means and ends’ (Vinnari and Dillard, 2016: 31) and their place on a supervisory board would seem essential if a more democratic stakeholder accountability is to be possible. This chapter has reported upon an exploratory case study of the accountability mechanisms adopted by TB. The findings and conclusions presented here are tentative and not generalisable. It is based on a close critical reading of the post financial crisis annual reports and current website of TB, but primary interviews with TB and their stakeholders would enable the issues of accountability, transparency and stakeholder discussions to be further explored and this is an avenue for future research. The findings are such, however, to indicate that O’Dwyer and Unerman (2016: 38) are correct in suggesting that there is great potential for productive and innovative accountability practices to be ‘emerging elsewhere that in listed company contexts’ and so there is scope for much more research to be undertaken in these more varied contexts.

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Cho, CH and Patten, D (2007) ‘The Role of Environmental Disclosures as Tools of Legitimacy: A Research Note’ 32 Accounting, Organizations and Society 639–47. Cooper, S and Slack, R (2015) ‘Reporting Practice, Impression Management and Company Performance: a Longitudinal and Comparative Analysis of Water Leakage Disclosure’ 45(6–7) Accounting and Business Research 801–40. Cooper, SM and Owen, DL (2007) ‘Corporate Social Reporting and Stakeholder Accountability: The Missing Link’ 32 Accounting, Organizations and Society 649–67. Craig, R and Amernic, J (2011) ‘Detecting Linguistic Traces of Destructive Narcissism at-a-distance in a CEO’s Letter to Shareholders’ 101(4) Journal of Business Ethics 563–75. Dhanani, A and Connolly, C (2012) ‘Discharging Not-for-profit Accountability: UK Charities and Public Discourse’ 25(7) Accounting, Auditing and Accountability Journal 1140–69. Fowler, CJ and Cordery, CJ (2015) ‘From Community to Public Ownership: a Tale of Changing Accountabilities’ 19(6) Accounting, Auditing & Accountability Journal 793–819. Gray, R, Owen, D and Adams, C (1996) Accounting & Accountability: Changes and Challenges in Corporate Social and Environmental Reporting (London, Prentice Hall). Guthrie, J and Parker, LD (1989) ‘Corporate Social Disclosure: a Rebuttal of Legitimacy Theory’ 19(76) Accounting and Business Research 243–52. Habermas, J (1984) The Theory of Communicative Action (Volume 1): Reason and the Rationalization of Society (London, Heinemann). —— (1992) Moral Consciousness and Communicative Action (Cambridge, Polity Press). IASB (2010) The Conceptual Framework for financial reporting 2010 (London, IFRS Foundation). Jacobs, K and Walker, SP (2004) ‘Accounting and Accountability in the Iona Community’ 17(3) Accounting, Auditing & Accountability Journal 361–81. Kent, P and Zunker, T (2013) ‘Attaining Legitimacy by Employee Information in Annual Reports’ 26(7) Accounting, Auditing and Accountability Journal 1072–106. KPMG (2015) The KPMG Survey of Corporate Responsibility Reporting 2015, KPMG International. Krippendorff, K (1980) Content Analysis: An Introduction to Its Methodology (Newbury Park CA, Sage Publications). Laine, M (2005) ‘Meanings of the Term “Sustainable Development” in Finnish Corporate Disclosures’ 29 Accounting Forum 395–413. Latour, B (2004) The Politics of Nature: How to Bring the Sciences back into Democracy, (Cambridge MA, Harvard University Press). Mäkelä, H and Laine, M (2011) ‘A CEO with Many Messages: Comparing the Ideological Representations Provided by Different Corporate Reports’ 35 Accounting Forum 217–31.

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Messner, M (2009) ‘The Limits of Accountability’ 34 Accounting, Organizations and Society 918–38. Mitchell, RK, Agle, BR, and Wood, DJ (1997) ‘Toward a Theory of Stakeholder Identification and Salience: Defining the Principle of Who Really Counts’ 22(4) The Academy of Management Review 853–86. Mouffe, C (2013) Agonistics: Thinking the World Politically (London, Verso). Neimark, MK (1995) The Hidden Dimensions of Annual Reports: Sixty Years of Social Conflict at General Motors (Princeton NJ, Markus Wiener). Neu, D, Warsame, H and Pedwell, K (1998) ‘Managing Public Impressions: Environmental Disclosures in Annual Reports’ 23(3) Accounting, Organizations and Society 265–82. O’Dwyer, B and Unerman, J (2016) ‘Fostering Rigour in Accounting for Social Sustainability’ 49 Accounting, Organizations and Society 32–40. Parker, L and Gould, G (1999) ‘Changing Public Sector Accountability: Critiquing New Directions’ 23(2) Accounting Forum 109–35. Roberts, J (1991) ‘The Possibilities of Accountability’ 16 Accounting, Organizations and Society 355–68. —— (1996) ‘From Discipline to Dialogue: Individualizing and Socializing Forms of Accountability’ in R Munro and J Mouritsen (eds), Accountability: Power, Ethos & the Technologies of Managing (London, International Thomson). —— (2003) ‘The Manufacture of Corporate Social Responsibility: Constructing Corporate Sensibility’ 10 Organization 249–65. Roberts, RW (1992) ‘Determinants of Corporate Social Responsibility Disclosure: An Application of Stakeholder Theory’ 17(6) Accounting Organizations and Society 595–612. Rorty, R (1989) Contingency, Irony and Solidarity (Cambridge, Cambridge University Press). Rubenstein, J (2007) ‘Accountability in an Unequal World’ 69 Journal of Politics 616–32. Samkin, G and Schneider, A (2010) ‘Accountability, Narrative Reporting and Legitimation: The Case of a New Zealand Public Benefit Entity’ 23(2) Accounting, Auditing & Accountability Journal 256–89. Senge, PM (1990) The Fifth Discipline, the Art and Practice of the Learning Organization (London, Century Business). Shaoul, J, Stafford, A, and Stapleton, P (2012) ‘Accountability and Corporate Governance of Public Private Partnerships’ 23(3) Critical Perspectives on Accounting 213–29. Sinclair, A (1995) ‘The Chameleon of Accountability: Forms and Discourses’ 20(2/3) Accounting, Organizations and Society 219–37. Stanton, P and Stanton, J (2002) ‘Corporate Annual Reports: Research Perspectives Used’ 15(4) Accounting, Auditing & Accountability Journal 478–500. Sternberg, E (2004) Corporate Governance: Accountability in the Marketplace (London, Institute of Economic Affairs).

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13 The Arrival of B Corps in Britain: Another Milestone Towards a More Nuanced Economy? DAVID HUNTER

I. Introduction Margaret Heffernan is a successful business woman and popular commentator on business affairs. Her range of interests runs much wider, however. In April 2016, Heffernan published an essay entitled More Than A Dream: Feminist Utopias and delivered a lecture on that subject at the University of Bristol. Business was not the focus of the talk, but three observations made by Heffernan during that lecture offer insights into the shifting history, current state and possible future direction of the corporate landscape, and I shall come back to these signposts in considering the introduction, reaction to and possible future for B Corps in the UK in this chapter. I will begin by describing some of the concerns with the corporate landscape that have been voiced in the last 30 years, the changes that have been seen during that time, and those changes that have remained conspicuous by their absence, as context for the emergence of B Corps. I will describe what B Corps are (and what they are not) and outline the reasons why a business may become a B Corp. Reservations have been expressed around B Corps in some quarters and these will be acknowledged before looking at the place of B Corps in the evolving corporate landscape and wider social economy. This leads into consideration of how ­businesses may thrive in the future, recognising that the corporate landscape is one part of a wider human (and non-human) picture and not, as it is often ­portrayed and feels, the whole story itself.

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II.  The Corporate Landscape in the UK into which B Corps have Launched In 1985, when the Companies Act was updated in the United Kingdom, the general perception was of a binary scenario where there were companies, which existed to perform various activities and aimed to make profits whilst doing so, and there were charities, whose purpose was to help the disadvantaged or to further particular causes and which did not make profits (and did not pay tax). The Companies Act 1985 was one part of a suite of legislation introduced by the government in the mid-1980s aimed at liberalising the economy, and particularly the financial sector, which quickly became known as the Big Bang. The years following the Big Bang saw a rash of privatisations of government enterprises, of demutualisations of building societies, relaxations of credit restrictions and many other changes contributing to a change in the business culture of the country, shifting towards a greater emphasis on profit maximisation and what became known as ‘shareholder value’. At various times since then, concerns have been expressed around some of the corporate behaviours and cultures this shift in emphasis has appeared to encourage. In the early 1990s, the Committee on the Financial Aspects of Corporate Governance, chaired by Sir Adrian Cadbury and subsequently better known as the Cadbury Committee, was established at a time when the sudden collapses of Asil Nadir’s Polly Peck, the Bank of Credit and Commerce International and the Maxwell Group had created widespread discontent and distrust in corporate practices. The Committee’s report of 1992 set out the building blocks for what has now become the UK Corporate Governance Code (Financial Reporting Council, 2016). 1995 saw the government ask Sir Richard Greenbury to report on directors’ remuneration at a time of concern over public perception of executives of large corporations as ‘fat cats’ looking after number one. Corporate governance was touched on again, as part of the Kay Review of UK Equity Markets and Long Term Decision Making, published in 2012 (UK Government, 2011a) and commissioned in response to the financial crash of 2008. And in the early months of 2017, the May government embarked on a corporate governance review and reform exercise (UK Government, 2016a) following a period in which the behaviour of the likes of Philip Green, the businessman whose private profit-seeking contributed to the demise of the UK retail chain BHS, and Mike Ashley, the CEO of Sports Direct, have attracted widespread condemnation. The events that provoked these various reviews demonstrate long-standing concerns with corporate practices since the mid-1980s and the ability of the business and financial sectors to absorb the impact of these reviews. Business and finance continue on the trajectories of focus on short term profit maximisation and optimising returns for shareholders and executives. The issues remain, and the enduring lack of economic growth and in particular flatlining earnings for

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the majority of the workforce, escalating inequality, increasing job insecurity and global economic instability, and the looming existential threats of climate change and resource depletion, all contribute to a more pervasive acceptance that changes are necessary. During this same period, there has been a shift away from the binary position of company or charity referred to above, with the rise of first the social enterprise and, more lately, the social investment concepts in the UK corporate landscape. Social enterprise does not have a legal definition and many have been offered over the last 25 years, but the UK government definition currently is ‘a business with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or in the community, rather than being driven by the need to maximise profit for shareholders and owners’ (UK Government, 2011b). Social Enterprise UK, the main membership body for social enterprises in England and Wales elaborates slightly with: Social enterprises trade to tackle social problems, improve communities, people’s life chances, or the environment. They make their money from selling goods and services in the open market, but they reinvest their profits back into the business or the local community (Social Enterprise UK, 2012).

According to Social Enterprise UK (2015), Government statistics identify around 70,000 social enterprises in the UK, contributing £24 billion to the economy and employing nearly a million people. In 2005, a new legal form, the community interest company (CIC), was created with the specific intention of being suitable for use by those wishing to establish and operate businesses acting as social enterprises.1 There has also been renewed interest in other, older legal forms which had largely fallen out of favour, such as co-operatives and industrial & provident societies (now community benefit societies, or ‘bencoms’, since the introduction of the Co-operative and Community Benefit Societies Act 2014).2 Each has met with modest success. As at April 2016, there were over 12,000 active CICs registered with the CIC Regulator.3 This means that on average, during that time, on every working day there has been five individuals or groups, creating a new organisation looking to deliver a social benefit through its activities. And as the growth of CICs is on an upward trajectory, that number is currently higher and increasing. Meanwhile, between 2009 and 2016, almost 120,000 people have invested over £100 million by acquiring community shares to support 350 community benefit societies and co-operatives across the UK.4 Community benefit societies exist 1 

See also Boeger et al, ch 18 in this volume.

2 www.legislation.gov.uk/ukpga/2014/14/contents.

3 Office of the Regulator of Community Interest Companies, www.gov.uk/government/ organisations/office-of-the-regulator-of-community-interest-companies. 4  Community Shares Unit, http://communityshares.org.uk/find-out-more/what-are-communityshares.

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(as their name suggests) to benefit the communities they serve and co-operatives, whilst being member led organisations, adhere to the International Co-operative Values and Principles (International Cooperative Alliance) which enshrine an ethical approach to engaging with others. Indeed, the Co-operative Movement could reasonably make claim to offering a corporate form that exists to deliver social good, with a heritage that dates back to the formation of the Rochdale Equitable Pioneers Society in 1844. It is also worth noting that many charities describe themselves—and, more importantly, behave—as social enterprises. Rather than remaining dependent upon grant income to fulfil their charitable purposes, they increasingly provide and charge for services to achieve those ends. The largest of these (the likes of Barnados, Action for Children, Turning Point and Shaw Trust) have turnover running into the tens, and sometimes hundreds of millions of pounds and employ thousands of people. A similar story applies in the funding space. The Bishop of Oxford case in 1991 established the ability of charities to engage in socially responsible investment.5 This became known as mixed motive investment but left many charity trustees feeling unsure of their responsibilities. The Charities (Protection and Social Investment) Act 20166 has now clarified charities’ powers to engage in social investment; that is, investing the charity’s money in a way which does not just seek to make a financial return for the charity, but also aims in some way to further the charity’s objects. Where once charitable foundations only offered grants to other charities, now many in addition provide social investments to charities and/or social ­enterprises to deliver charitable outcomes. This is consistent with the growth in social investment in recent years. Dealflow has more than doubled in value since 2011, representing roughly a 20 per cent annual growth rate between then and the end of 2015, when the value of social investment in the UK stood at around £1.5 billion (Big Society Capital, 2016). And at a policy level, the UK government has a stated aim for the country to be the global leader in social investment, supported by a string of initiatives such as the creation of social wholesale funder Big Society Capital, support for funding products such as the social impact bond and the introduction of tax incentives such as Social Investment Tax Relief to encourage the engagement of individuals with the sector (UK Government, 2016b). The activity and interest witnessed in relation to all this invites two high level conclusions to be drawn: —— There is a clear and growing appetite for this approach to business and investment which extends beyond looking solely at the financial return from an activity. —— It is still a relatively small element of the national economy. 5 

Harries v The Church Commissioners for England [1992] 1 WLR 1241.

6 www.legislation.gov.uk/ukpga/2016/4/contents/enacted.

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The characteristics of charities, community interest companies and community benefit societies that mean that grant givers, public bodies and individuals may trust them are often also the factors which deter others from adopting those legal forms. Asset locks are features of CICs and bencoms, and they ensure that the owners of these organisations cannot realise increases in the value of the organisation by selling either their stake at a premium or the individual assets. They may receive dividends, in the case of CICs, but subject to a cap (see below); and members of bencoms may receive interest on their shares where the board decides that it is in the interests of the organisation to do so (but which must be no higher than necessary to attract the investment). Beyond this, however, surpluses are intended to be recycled for the purposes of the community benefit for which the organisations exist, and if the entities are wound up at any point, assets held at that time are to be transferred to other asset locked organisations. Whilst this, and objects focused on public or community benefit, provide reassurance and credibility for those who are exclusively concerned with the social outcomes that may be delivered, they can be overly restrictive for those looking to achieve a balance between social outcomes and delivering financial growth and returns. In other words, they have been regarded by some as being weighted too much to the social and not enough to the business or enterprise. This has been acknowledged to some extent, and steps have been taken to relax the restrictions on a CIC’s ability to distribute surpluses to investors (whether shareholders or lenders). Initially, these restrictions meant that (a) a maximum of 35 per cent of a CIC’s profits may be distributed by way of dividend in any year, (b) dividends could not be paid at a rate exceeding five per cent over the Bank of England base rate (c) share capital could only be repaid at par and (d) interest paid on loans or bonds could only be at rates tied to the CIC’s financial performance. Over time, both the demand for the CIC form, but also the problems of attracting finance became apparent and an attempt was made to relax and simplify these requirements. The response was still muted and with effect from 1 October 2014, further changes were introduced with The Community Interest Company (Amendment) Regulations 2014.7 These removed the cap on the maximum dividend per share, retained the aggregate dividend cap at 35 per cent and increased the maximum interest rate for performance related interest to 20 per cent. This, together with the advent of social investment tax relief, has led to more interest in investment in CICs in the intervening period. However, the asset lock remains and, as with bencoms, provides an important protection of corporate assets in the interests of the community regardless of changes in the control or influence of the organisation in future years. Even with these changes though, there are many entrepreneurs who are ­committed to delivering social and/or environmental impact but who balk at the restrictions that accompany CIC status and who therefore adopt the standard

7 www.legislation.gov.uk/uksi/2014/2483/contents/made.

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­ rivate company limited by shares format and rely on their own enduring conp science to do the right thing. This works up to a point, but remains susceptible to changes of heart on the part of the individual or changes in ownership which may mean a different outlook in the future. It excludes some types of funding (grants and social investment) from being available to such organisations and inhibits their ability to promote themselves as recognisable and committed social enterprises. It is into this corporate landscape, in which there is growing concern about various aspects of corporate practice, but a reluctance on the part of some entrepreneurs and investors to accept the restrictions associated with social enterprise status, that B Corps were launched in the UK in the autumn of 2015, potentially offering a social entrepreneur the chance to demonstrate very publicly their social credentials whilst remaining free of some of the constraints associated with established social enterprise forms.

III.  B Corps—What they are and what they are not The B Corp movement is a global movement which aims to introduce new standards of social and environmental performance and use these to identify businesses which are using ‘business as a force for good’. It began in the US in the mid-2000s when two of the individuals behind the successful sports footwear company AND 1, Jay Coen Gilbert and Bart Houlahan, joined with Andrew Kassoy, a former Wall Street private equity investor. Having contemplated creating a new social business, or a new social investment fund, they decided that they could contribute more towards the philosophy of business as a force for good by doing two things. The first was creating a legal framework which would enable businesses to thrive whilst maintaining their original mission and values. The second was establishing credible standards, adherence to which would independently validate businesses’ credentials in an arena where most companies are making claims to do good. This led to the development of the B Corporation concept and the formation of B Lab, a not for profit organisation promoting the concept and protecting the brand (B Corporation, 2017a). It is simultaneously a strength and weakness of B Corps that the status is voluntarily acquired, rather than statutorily imposed. On the positive side, this has meant it has been possible for the concept to spread rapidly across the globe. Since their advent in 2007, B Corps have become certified in many jurisdictions and as at March 2017, there are over 2,000 businesses from 50 countries certified as B Corps (B Corporation, 2017b). These include 109 UK companies who have taken the opportunity to register as B Corps since that became possible in September 2015. The weakness, which we shall touch on later, is the theoretical ease with which a company may unpick the credentials that made it a B Corp and revert to a more traditional modus operandi.

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A B Corp is not a legal form. It is a certification, an independent assurance that the organisation in question has met the criteria to be allowed to call itself a B Corp. This is distinct from the Benefit Corporation, a legal form introduced by statute now in over 30 states in the US, in Italy and under serious consideration in Australia, which bears some similar features and a broadly similar objective to B Corps (and is touched on further below). As far as B Corps are concerned, appropriate comparators are the certification schemes operated by the Fairtrade Foundation, Forest Stewardship Council and the Soil Association, offering consumers a reliable means of identifying products which meet particular standards. Becoming a B Corp requires passing the three elements of the B Corp ‘test’, namely: —— The performance test: The business must meet a rigorous set of standards (the B Impact Assessment)8 which measure the overall impact of a company on its stakeholders.9 The standards are developed by an independent committee with industry and sector expertise10 and include the following broad sections: governance, workers, communities, environment and impact business models. B Lab UK, the charity that runs the B Corp operation in the UK, states that most businesses change their business behaviours (for example changing the way that suppliers are sourced, or increasing salaries to their lowest paid workers) to obtain the necessary number of points (80 out of 200) to certify as a B Corp. They state scoring 80 points from a possible 200 is more challenging than it sounds, which is why most businesses need to change their practices in some respects to certify. The test is repeated every two years, although there is testimony on the B Lab website that B Corps use it more regularly than that as a performance management tool.11 —— The legal test: It is a requirement for all B Corps to amend their constitutional documents to enshrine a commitment to the ‘triple bottom line’ approach to business. In practice, for a typical business, this principally means including an objects clause which states that it exists to promote the success of the business for the benefit of its shareholder members but also to have a material positive impact on society and the environment, along with other related requirements. This is expanded upon below. —— The B Corp declaration of interdependence: all B Corps must sign the B Corp Declaration of Interdependence which sets out a commitment to all stakeholders.12 Where a business passes the impact assessment, fulfils the legal requirement and makes the declaration (and pays a fee), it is able to adopt the B Corp certification. 8 http://bimpactassessment.net/.

9  Stakeholders in this context include employees, customers, supply chain, communities in which the business operates, the environment and investors and this is how the term is used in this chapter. 10 http://bimpactassessment.net/our-team. 11 http://bcorporation.uk/become-a-b-corp/why-become-a-b-corp/benchmark-performance. 12 www.bcorporation.net/what-are-b-corps/the-b-corp-declaration.

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The legal test for a B Corp requires the adoption of wording in the constitutional document which repeats section 172 (1) of the Companies Act 2006, with some small but significant alterations which provide an explicit context, rather than leaving it to interpretation and convention in terms of its application in ­practice. The additional text is emphasised below: (1) The purposes of the Company are to promote the success of the Company for the benefit of its members as a whole and, through its business and operations, to have a material positive impact on society and the environment, taken as a whole. (2) A Director shall have regard (amongst other matters) to: a. the likely consequences of any decision in the long term, b. the interests of the Company’s employees, c. the need to foster the Company’s business relationships with suppliers, customers and others, d. the impact of the Company’s operations on the community and the environment, e. the desirability of the Company maintaining a reputation for high standards of business conduct, and f. the need to act fairly as between members of the Company, (together, the matters referred to above shall be defined for the purposes of this Article as the ‘Stakeholder Interests’). (3) For the purposes of a Director’s duty to act in the way he or she considers, in good faith, most likely to promote the success of the Company, a Director shall not be required to regard the benefit of any particular Stakeholder Interest or group of Stakeholder Interests as more important than any other. (4) Nothing in this Article express or implied, is intended to or shall create or grant any right or any cause of action to, by or for any person (other than the Company). (5) The Directors of the Company shall for each financial year of the Company prepare a strategic report as if sections 414A(1) and 414C of the Companies Act 2006 (as in force at the date of adoption of these Articles) applies to the Company whether or not they would be required to do so otherwise than by this Article.

The intent behind this wording was to strike a balance between adherence to the wording that had gained recognition and traction in the US and elsewhere and the statutory framework in the UK familiar to businesses and legal advisors in that jurisdiction. Whilst the UK Legal Test articulates the factors that a director should consider, there is no indication in the test as to how these factors should be weighed. The directors of a prospective B Corp may find it helpful to include a set of guiding principles that set out the aims and principles by which the Company will conduct its business and enable the B Corp to express in more elaborate ways the aspects of its social responsibility. Whereas in the US, the distinction between for profit and not for profit entities is pretty clear, in the UK it has been necessary to consider whether different legal forms are eligible for B Corp status. The distinction has focused on whether an organisation generates most of its revenue from trading and operates in a

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competitive market place. Following this through, although there may be exceptions, the assumption is that community interest companies can also be B Corps; that companies limited by guarantee may (if they are not charities and meet the trading requirement above); and community benefit societies and co-operatives may, along with partnerships, limited or otherwise, again if they meet the trading test. Charities and public bodies (or organisations primarily owned by public ­bodies), it is assumed, cannot.

IV.  Why become a B Corp? In simple terms, the distinctions between a B Corp and traditional business forms—and their comparative strengths—relate to the legal and performance tests. The clarification made to the articles or other governing document makes explicit that the board is required to take decisions with a view to furthering the shareholders’ interests in the context of having a material positive impact on society and the environment as a whole. This is a subtle but significant shift from the section 172 duty to ‘have regard to’ such matters which, in practice, appears to require little more than inserting standard wording in board minutes to tick the regulatory box. It is a demonstrable statement of intent on the part of the organisation. It serves to focus the minds of B Corp directors on the wider impact of their actions and the underlying purpose of their organisation. It also means that they cannot rely on following the conventional approach to justify not giving due consideration to wider stakeholder interests. Over time, one would expect the cumulative effect of decision-making on this basis to have a significant impact on how that business operates. The bi-annual B Impact Assessment provides external accreditation of a B Corp’s business practices: evidence they are ‘walking the walk, as well as talking the talk’. This is the link between the intention and the effect and is a further motivation for B Corps to follow through on the aspiration to be a business existing to do good. The aim is that B Corp status will become as recognisable as the likes of the Fairtrade mark and provide a trusted assurance of the mission-led nature of the organisation. For organisations that regard themselves as being driven by more than profit maximisation, B Corp status is potentially a relatively easy means to validate and promote what they already are. As such, the intention is that B Corp status will deliver financial benefits deriving from ethical business practice.

V.  Reservations about B Corps Challenges to the B Corp model have come from different quarters. There are those who argue, like Lynn Stout, that the B Corp is unnecessary and potentially

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detrimental to the extent it creates ‘a misunderstanding of what the … corporations, which dominate our economy, can and cannot do’ (Gunter, 2013). This view is based upon Stout’s argument, expounded in The Shareholder Value Myth (Stout, 2012), that the legal doctrine known as the business judgement rule gives managers and directors wide latitude to lead businesses as they see fit, so long as they don’t use their power to enrich themselves. Similarly, in relation to the UK, there are those who argue that the directors’ duties set out in the Companies Act 2006 do not preclude acting in the manner promoted by B Corp status. In particular, Section 172 of that Act addresses the duty to promote the success of the company having regard to various factors in promoting the success of the company for the benefit of its members. Those factors are the same as those B Corps define as ‘stakeholder interests’, so the argument goes that the duty already exists. However, the prevalent interpretation of this provision in practice has been that the members’ interests are pre-eminent and equate to profit maximisation and that having regard to the matters outlined in section 172 (1) rarely impinges upon that approach. There may be companies where the members want their board to do more than have regard to these considerations. This may extend to having articles which make specific reference to purposes other than the benefit of its members, something which is anticipated by section 172 (2) of the Act. This happens rarely in practice. If it does, again the argument is it means B Corp status is unnecessary. If it does not, it is evidence there is no appetite for a greater emphasis on stakeholder interests than already provided for in the legislation. A different criticism is voiced by those who say that the governance provisions which are so important to achieving B Corp status are not entrenched and can be changed at any time by the owners of the business, releasing the organisation from those corporate commitments which its stakeholders may have placed significant weight upon. Whilst this is true, if the B Corp movement achieves the sort of public profile that Fairtrade enjoys, there should be a deterrent in the material reputational harm for a business which deliberately changes its constitution to allow it to preference its owners’ interests above those of its wider stakeholders. An alternative is for a company contemplating B Corp status to go further and both state their social purpose more clearly in the objects of the company and lock‑in this purpose by way of mission lock. This is distinct from an asset lock and can be achieved by a variety of means, mostly based upon a veto on changing the relevant elements of the constitution being held by a third party with no interest in or duty to the organisation, other than to protect that mission. This would certainly deal with nervousness about the ability of the commitment to the legal test to be unwound at a future date. However, it is a much more significant demand to be made of shareholders of an existing company, unless they are very committed to the concept of mission-led business and either do not think this will materially adversely affect the value of the business, or are not concerned if it does. This touches on the position of those who argue that B Corps are destined to fail because shareholders and investors will not take kindly to moving away

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from focusing on shareholder value and so they will never gain traction. The best counter-argument to this came on 31 January 2017, when Laureate Education completed an initial public offering, which raised $490,000,000. Laureate is a benefit corporation, demonstrating the financial markets were undeterred by its explicit commitment to social impact as well as financial performance. Perturbed, perhaps, that B Corps may either confuse people as to what is or is not social enterprise, or deflect attention and funding from social enterprises, that sector has voiced concerns that the B Corp model may provide further means for big business to engage in corporate social responsibility branding without genuinely changing their profit focused approach. The manner in which CSR has been co-opted by some businesses, making it part of their marketing and obfuscating the more detrimental aspects of their activities does mean this is a valid concern, which can only be measured in practice over time. The commitments required to be made are not insignificant however, and if behaviours of B Corps, whomever they are, are closely monitored, and hitherto mainstream businesses are changing their businesses practices sufficiently to qualify as B Corps, that is potentially a desirable shift, even if the motivation to do so is financial as well as ethical. This will depend, to a degree, on how robust the assessment remains. The underlying concern of social enterprises and the need to distinguish between them and B Corps can perhaps be addressed by thinking of social enterprises as ‘Profit for Purpose’ organisations and B Corps as ‘Profit with Purpose’ organisations. In other words, social enterprises make surpluses either to a large extent or exclusively to reinvest in delivering their mission, whereas B Corps may make and distribute to shareholders significant profits if they can demonstrate that in doing so they have taken into account their social and environmental impact and, as measured by the B Impact Assessment, this has been sufficiently positive. To the extent some social enterprises may elect to become B Corps in addition to their social enterprise status (presumably because they see value in the label and the network they become part of), this does not affect the distinction. The social enterprise movement may well though remain sensitive to B Corps that make and distribute significant profits calling themselves social enterprises.

VI.  The Changing Corporate Landscape In both the US and the UK, other developments are taking place which extend the direction of travel represented by B Corps. Following the advent of B Corps in the US, individual states began to introduce legislation enabling businesses to adopt the legal status of a benefit corporation.13 There are strong similarities with

13 Examples of relevant legislation can be found at http://benefitcorp.net/policymakers/stateby-state-status.

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B Corps, not least that the legal status of benefit corporations requires them to serve not only shareholders but also stakeholders, such as workers and consumers. The terminology is inevitably confusing, but one way to think about it is that B Corps must eventually meet the same legal standards as benefit corporations (ie through the legal test), but benefit corporations need not meet the same verified performance standards as B Corps. The two forms are not in competition, with B Lab, the not for profit organisation behind the B Corp movement, working with companies that want to become benefit corporations and encouraging states in the US to adopt the benefit corporation legislation. As of January 2017, 30 US states along with the District of Columbia have recognised the benefit corporation form and at the end of 2015, Italy legislated for the introduction of the Benefit Corporations there, known as Societa Benefit. In the UK, the government conducted a policy review in 2016 on mission-led businesses to create a vision for the potential role of such businesses and consider how to better support them. An Advisory Panel reported before the end of the year and the government is looking at how its recommendations might be implemented (Advisory Panel Report, 2016). There is also an intention to introduce a new bill into Parliament focusing on social investment in 2017. Such developments in both the UK and US are indications of a growing acceptance of the relevance of the fundamental principle underlying B Corps, which is that capitalism needs to extend beyond focusing solely on optimising shareholder value to delivering value for all stakeholders or, as Jay Coen Gilbert simplifies it further, it is about capitalism ‘walking and chewing gum at the same time’ (Gilbert, 2010).

VII.  The Place of the B Corp in the Wider Social Economy This suggests the potential at least for further movement along the spectrum of what corporations exist to do. I mentioned Margaret Heffernan in the introduction to this paper. When she spoke in Bristol, she observed that many of the battles and tensions between men and women may simply become irrelevant as gender ceases to be an either/or of male and female. Several countries, from Norway to India to Australia, already offer a more LGBT-friendly set of options for those applying for passports. Defining people, their rights and abilities by whether they are a man or a woman will become a redundant distinction, she argues, and will enable attention to shift to more fundamental questions. I see something similar happening with the proliferation of corporate forms in the United Kingdom creating the space to focus on the ultimate purpose of business. Part of this proliferation takes the form of cross-pollination. In 2016, the T ­ inder Foundation successfully registered as a charity. This is notwithstanding it is an employee owned co-operative. Whereas previously the common wisdom was that private ownership and charitable status (with its focus on public benefit) were

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incompatible, the Foundation successfully argued that it was a mutual not for its own interest but for the public good, and that although every staff member has made a nominal £1 commitment, their real investment was in the Foundation’s social aims. It had to show that all profits are not shared with members but ploughed back into its work. It had three and a half years’ worth of compelling evidence about the social good it had achieved—and that it had been achieved because of its staff engagement, interest and expertise. It was (rightly) challenged by the Charity Commission on these points but ultimately the Foundation satisfied them of its charitable nature: one more example of the blurring of legal forms and status among organisations, potentially in very positive ways. As noted earlier, CICs, community benefit societies and co-operatives can potentially be B Corps, so the advent of B Corps should not be regarded as a direct challenge to these forms. Rather, it is about broadening the reach of purposedriven businesses beyond the constraints of those forms. There will still be an important role for other legal forms, whether co-operatives, community benefit societies, forms of employee ownership, mutuality and others yet to gain widespread attention or even exist yet. The progress along that corporate spectrum is still important, however. There is still a perception that unless you are a distinct legal form, such as a CIC, or charity or community benefit society, then you are a company and therefore exist to maximise profit. This remains potentially damaging, in that this default expectation of most limited companies inevitably influences behaviours. It is also inaccurate. If we go back to section 172 (2) of the Companies Act 2006, this states: Where or to the extent that the purposes of the company consist of or include purposes other than the benefit of its members, subsection (1) has effect as if the reference to promoting the success of the company for the benefit of its members were to achieving those purposes.

This acknowledges the ability of companies, whether limited by guarantee or shares, to operate with objects that promote purposes other than maximising shareholder benefit. The difficulty currently is that few do, and where they do there is no guidance for directors on what that means in practice in terms of their duties. There is no reporting framework, as there is for CICs—and B Corps— around delivery of community benefit or social impact. And there is no way to recognise instantly such a company with a social purpose distinctly from other companies generally as, again, there is with those enjoying the CIC suffix, and/or the B Corp certification.

VIII.  Where Next? The second comment of Margaret Heffernan’s which resonated was, ‘The future belongs to those who can imagine it’. This was true of the weavers who came

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together to form the Rochdale Society of Equitable Pioneers in 1844 and established principles which are today enshrined in the International Co-operative Values and still dictate how significant businesses such as Mondragon in Spain, Cecosesola in Venezuela and The Phone Co-op in the UK successfully trade. It applied to Stephen Lloyd and those who worked with him to bring the community interest company onto the statute books in the UK and create a vehicle which offers a simple legal form for those attracted to the social enterprise ethos. And it is relevant to Jay Coen Gilbert and his co-creators of the B Corp concept, who saw for-profit enterprise as a means of doing good, but no way of formalising that at the time. Common to all of these is a desire to use business as a force for good and to measure its success by the amount of good it delivers to its stakeholders, rather than the amount of wealth it amasses for its shareholders. ‘How’ is as important as ‘how much’, as manifested in the Rochdale Principles, the community interest test and the B Corp Declaration. In contrast, the innovation that has taken place at the other end of the corporate spectrum has tended towards building intricate and opaque corporate structures to take advantage of offshore tax havens and transfer pricing regulations. Whilst there has been a sense in the past perhaps that this is ‘just the way it is’, the first few months of 2016 brought us revelations of the scale of this practice and its prevalence among global politicians, multinationals and crime syndicates in the Panama Papers; we saw the governance failings that permit owners to extract hundreds of millions of pounds from a private company, then leave it with a pension deficit of equivalent magnitude; and there was the launch of a film, The Divide, which vividly demonstrates the impact on individual lives of the social and economic consequences of inequality highlighted by Kate Wilkinson and Richard Pickett in The Spirit Level (Wilkinson and Pickett, 2010). Growing distaste with these practices, technically legal but morally dubious at best, may provide fertile ground in which the vision of those that can imagine a future economy comprised of businesses (and governments) with inbuilt social responsibility can take root and flourish. The last 30 years have demonstrated that incremental steps have been an effective (albeit slow) way to alter the corporate landscape. It has meant social enterprise and social finance are now established, if peripheral, aspects of it. The introduction of B Corps to the UK is one more of these steps. It is potentially a significant one, as it does not impose an ‘artificial’ limit on the ability to make money from a company’s activities. The limit comes from the setting of and adherence to a balance of priorities embedded in the company’s governance. If a critical mass of B Corps can be established, such that the question begins to be asked, ‘why are you not a B Corp?’, it then becomes only one more small step to elaborate on the provisions of section 172 of the Companies Act so that it becomes easy and usual to operate with articles like those adopted by B Corps to pass the legal test. Such a legislative change will seem clarificatory, rather than radical in those circumstances, but will represent a seismic shift from the position only 11 years ago.

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Reach this point and Stout’s argument may have more credence. However, reaching this point is likely to be regarded as a triumph for those behind B Lab UK and B Corps will have almost certainly played a part in that achievement. It also becomes possible to imagine investment classes focused on purposedriven businesses and an extrapolation of the Divestment–Reinvestment initiative (which focuses on persuading organisations to sell their investments in fossil fuel businesses and place them instead in enterprises focused on renewable energy) encouraging charities and other public bodies to invest in B Corps or mission locked businesses exclusively in the future, being more explicitly aligned with their own purposes. In July 2012, John Kay published his review of the UK Equity Markets, with his central finding ‘that short-termism is a problem in UK equity markets, and that the principal causes are the decline of trust and the misalignment of incentives throughout the equity investment chain’ (UK Government, 2011a: 9). Kay recognised this as a systemic issue that needed to be addressed on a number of levels. The philosophy underpinning B Corps and their adoption as a desirable status by businesses is potentially one more means of enabling a shift away from shorttermism and narrow financial only considerations. Once again, this is not to suggest that B Corps are about to single-handedly change the corporate landscape, but taking the above examples further, they offer the possibility both to create a virtuous circle in investment terms, extending the basis upon which investments are made, and potentially making future legislative adjustments to directors’ duties appear as little more than formalising in statute what is market practice.

IX.  Conclusion: The Corporate Landscape and the Bigger Picture Businesses, indeed economies, are merely human constructs, of course. We created them to help us to do things more effectively. They are not, or should not be, ends in themselves. They should operate in service of our larger purpose, not the other way around. This leads to the third of Margaret Heffernan’s comments that is relevant here. She spoke, in the context of effecting social change (which is what B Corps aspire to do), of the significance of love, not power, as the prime motivator. Now I admit, I have not done the analysis to provide hard statistics on this, but I am reasonably confident that a review of 100 randomly selected texts about how to run successful businesses would probably identify thousands of references to power, but few (if any) to love. Yet whereas power is a zero sum game and where power increases it is often to the detriment of another or others, love generates more love—truly sustainable

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growth. This is not to suggest, of course, that it is all that is required for a business to succeed, but an economy and a business that embraces love as a positive force, rather than excluding it as irrelevant, has more prospect of retaining a focus on purpose and achieving success in delivering that purpose. It is the sort of success that has wide reaching benefits. It can contribute to reducing inequality; can avoid exploitation of workers, supply chains, customers and the environment; and will not expect or create a need for the state to pick up the bill when jobs don’t exist, houses are unaffordable, or workers are not suitably qualified. It will not demand subsidies not to leave the area or to remain trading. The progress of social enterprise and investment over the last 30 years to where we are today has been incremental.14 Attempts to engineer shifts in corporate focus have largely resorted to use of business language to appear benign and unthreatening, hence corporate social responsibility, social return on investment, social capital and the like. In most cases, this has led to a degree of acceptance, without threatening the underlying assumptions of what business is for. Maybe, though, it has served a useful role preparing the ground for a more explicit conversation about responsibility and purpose in which matters like market dominance and scale seem less significant than providing fulfilling work and stimulating emotions of loyalty and pride. In a similar vein, I have suggested that B Corps represent one more step towards the centre ground, with less constraints than are found in CICs, co-operatives or bencoms, but with a demonstrable commitment to looking beyond financial considerations only. I have also speculated that if B Corps become established, it may be easier to contemplate and implement the next measures to make such an approach to business the norm. As such, they may also be a catalyst for a change in how business is regarded: less in terms of what it can successfully extract from the human and natural resources available to it and more about what it can create and contribute by working with people and nature. If that point is reached, distinctions between profit and not for profit will have become largely irrelevant; a future well imagined will be happily present; and the intrinsic motive of love, rather than the extrinsic one of power, will underpin the successful ventures of the day.

References Advisory Panel Report (2016) ‘On a Mission in the UK Economy’, www.gov.uk/ government/uploads/system/uploads/attachment_data/file/574694/Advisory_ Panel_Report_-_Mission-led_Business.pdf.

14 

See also Dan Gregory, ch 17 in this volume.

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B Corporation (2017a) ‘About B Lab’, www.bcorporation.net/what-are-b-corps/ about-b-lab. B Corporation (2017b) ‘Get to know B Corps certified in the UK’ (2017b) http:// bcorporation.uk/get-to-know-b-corps-certified-in-the-uk. Big Society Capital (2016) ‘The Size and Composition of Social Investment in the UK’, www.bigsocietycapital.com/latest/type/blog/size-and-shape-socialinvestment-uk?utm_source=Big+Society+Capital+main+email+list&utm_ campaign=b1b159b0b6-The+size+and+shape+of+social+investment+in+ the+UK&utm_medium=email&utm_term=0_bfa7feb66e-b1b159b0b6277192409. Community Shares Unit, http://communityshares.org.uk/find-out-more/whatare-community-shares. Gilbert, JC (2010) ‘On Better Business’, TEDx Talk www.youtube.com/ watch?v=mGnz-w9p5FU. Gunter, M (2013) ‘B Corps: sustainability will be shaped by the market, not corporate law’ The Guardian www.theguardian.com/sustainable-business/ b-corps-markets-corporate-law. Harries v The Church Commissioners for England [1992] 1 WLR 1241. Heffernan, M (2017) More Than A Dream: Feminist Utopias (Farrington Gurney, Marlin Publishing). http://benefitcorp.net/policymakers/state-by-state-status. http://bimpactassessment.net/. http://bimpactassessment.net/our-team., last accessed 15 March 2017. International Co-operative Alliance, ‘Co-operative Principles’ http://ica.coop/en/ whats-co-op/co-operative-identity-values-principles. Office of the Regulator of Community Interest Companies, www.gov.uk/government/ organisations/office-of-the-regulator-of-community-interest-companies. Social Enterprise UK (2012) ‘Social Enterprise Explained’, www.socialenterprise. org.uk/social-enterprise-explained. Social Enterprise UK (2015) ‘State of Social Enterprise eSurvey 2015’, http://socialenter pr ise.org .uk/uplo ads/editor/files/Publications/ FINALVERSIONStateofSocialEnterpriseReport2015.pdf. Stout, L (2012) The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public (Oakland CA, Berrett-Koehler Publishers). The Financial Reporting Council (2016) ‘UK Corporate Governance Code’, www. frc.org.uk/Our-Work/Codes-Standards/Corporate-governance/UK-CorporateGovernance-Code.aspx. UIK Government (2016b), Social Investment tax Relief, www.gov.uk/ gover nment/publications/social-invest ment-tax-relief-factsheet/ social-investment-tax-relief. UK Government, Department for Business Innovation and Skills (2011b) ‘A Guide to Legal Forms for Social Enterprise, www.gov.uk/government/ uploads/system/uploads/attachment_data/file/31677/11-1400-guide-legalforms-for-social-enterprise.pdf.

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UK Government, Department for Business, Energy, Innovation and Skills (2016a) ‘Corporate Governance Reform Green Paper’, www.gov.uk/government/ consultations/corporate-governance-reform. UK Government, Department for Business, Innovation and Skills (2011a) ‘Kay review of UK equity markets and long-term decision making’, www.gov.uk/government/consultations/the-kay-review-of-uk-equitymarkets-and-long-term-decision-making. Wilkinson, R and Pickett, K (2010) The Spirit Level: Why Equality is Better for Everyone (London, Penguin). www.bcorporation.net/what-are-b-corps/the-b-corp-declaration. www.bcorporation.uk/become-a-b-corp/why-become-a-b-corp/benchmarkperformance. www.legislation.gov.uk/ukpga/2014/14/contents. www.legislation.gov.uk/ukpga/2016/4/contents/enacted. www.legislation.gov.uk/uksi/2014/2483/contents/made.

14 Danish Foundations and Cooperatives as Forms of Corporate Governance: Origins and Impacts on Firm Strategies and Societies PEER HULL KRISTENSEN AND GLENN MORGAN

I. Introduction The idea that any large scale private organisation seeking to coordinate and direct large numbers of people, large amounts of capital and complex production processes should take on the form of a shareholder driven, limited liability corporation is an ahistorical view of how industrialising societies laid the foundations for growth and development. In nineteenth century Europe and the USA, there were a variety of templates available ranging from family owned businesses to partnerships, cooperatives and other collective forms of organisation building. This variety has continued into the twenty-first century with the development of other corporate forms such as the Benefit Corporation (see other chapters in this volume). The limited liability/joint stock structure was at the beginning seen as a privilege granted by the state in exchange of a set of duties specified in a charter, This corporate form was diffused across various countries from the midnineteenth century onwards. However, for much of the time it has existed alongside other corporate forms in both Europe and the USA (for the discussion on the US see Schneiberg, 2007; Schneiberg et al, 2008; Campbell et al, 1991). Even where such companies were established the legal duties associated with joint stock limited liability were often unclear. The question of whether the firm should be run in the sole interests of the shareholders or whether the firm had an identity of its own over which a variety of claims (including the claims of the shareholders) could be made, was contested (Veldman, 2013; Ireland, 2010; Ireland, 1999). Not until the 1980s could it be said that the priority of the shareholders’ claims had become an accepted part of the discourse about the nature of firms and even then this was i­nitially mainly within the US-UK corporate governance system

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(Davis, 2009). The UK drove furthest towards homogeneity in corporate form during the 1980s and 1990s, particularly through the conversion of different forms of mutually owned financial institutions into public limited companies (Morgan and Sturdy, 2000). In this period, the influence of the shareholder value model as a set of discourses and associated practices expanded in Europe and more globally due to the pressure of international financial institutions and international funding and certification bodies to use this framework as a norm or standard practice for firms. Nevertheless there remained substantial national differences in corporate governance mechanisms (Morck, 2007) and by the 2000s and especially following the Global Financial Crisis of 2008–09, the narrow framing of corporate objectives in terms of shareholder value was being challenged by the increased exposure of the consequences of such policies for the environment, for the treatment of workers, for tax revenues and for the stability of economic systems (Stout, 2012; Mayer, 2013). As a result, reforming the corporation and introducing greater diversity of corporate forms has moved up the political agenda (see eg The Purpose of the Corporation project, www.purposeofcorporation.org/en; Parker et al, 2007; contributions to this volume). This chapter seeks to recover the idea of a diversity of organisational forms by examining the experience of Denmark, a country where other forms of ownership, particularly cooperatives and industrial foundations, are common. Our aim is not just to describe the Danish system but to explore the social origins and social consequences of these forms. In particular, we return to the idea that collective forms of organisation are responses to the challenges that face actors in particular circumstances and under particular institutional constraints and enablers (Kristensen and Morgan, 2012; Schneiberg, 2007; Djelic and Quack, 2007). The particular circumstances of early industrialisation required new ways of organising the financing and managing of enterprises that were increasingly large in scale. In the early nineteenth century, although there had since the late seventeenth century been some experiments in the joint stock limited liability form, companies based on this were considered special cases, usually brought into existence on an exceptional case-by-case basis by the state and involving duties and responsibilities as well as rights, embedded in a formal charter by which the corporation could be held responsible. Most business activity of any scale was not organised in this way and depended on personal wealth, partnership structures, bank loans and the owners/partners being responsible for all debts. Building scale in businesses and engaging in large risk-taking ventures was limited by these structures so actors began to develop new forms. By the mid-nineteenth century, therefore, there existed two main types of large scale organisation alongside each other.1 First, there were those ­organisations which were governed either as cooperatives or mutually owned companies where 1  Note that our focus is on large scale organisational forms, not small firms, sole proprietorships or partnerships (which were generally limited in number in most countries until the growth of the large professional services firms of accountants, lawyers etc in the mid-twentieth century).

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earnings were retained internally for the benefits of the members and for the growth of the organisation; in these contexts, managements had to balance off a variety of interests reflecting a broader vision of the social as well as economic purpose of the organisation. Second there were the emerging limited liability companies, the form of which became legalised and generalised during legislative changes in the nineteenth century (Djelic, 2013) and where a set of internal and external shareholders had an over-riding influence on the purpose of the organisation. Although there were challenges as to the meaning of these legal structures (Ireland, 1999), other interests such as employees, consumers or society more generally were unable to establish any formal influence on how the firm worked or the decisions it took. Initially, as shareholding dispersed amongst the individually wealthy, shareholders themselves were more a rentier class owning a very small percentage of any company and living off their dividends rather than being active participants in the company. In the 1930s through to the 1970s, many authors discussed the rise of the managerial class who in effect controlled the large corporations with dispersed ownership (eg Chandler, 1977). Only as shareholding became more concentrated in the hands of financial institutions and financial markets more active in corporate control from the 1980s onwards did the objectives of the firm in many countries start to narrow in order to massively prioritise the interests of the shareholders (Davis, 2009), even whilst in practice, many countries retained governance structures that allowed for alternatives. These alternatives tended to be treated in the UK especially as relics of the past, doomed to die out and decline— as mutual building societies and insurance companies did in the UK in the 1980s and 1990s shifting over to plc structures (Morgan and Sturdy, 2000). Elsewhere, they have continued to be important developing new variations to meet changing competitive conditions. Historically it seems that where economic actors were already organised hierarchically with strong social and economic distinctions between rich and poor, between those who hold forms of capital which are fungible and transferable across different assets and those who survive only by virtue of their labour power, the responses to the challenges of large-scale organisation were likely to be dominated by the more powerful actors seeking to create organisational forms which reproduced and extended their status and position in control of both the firm and the society. Such contexts encouraged the joint stock limited liability company where power over the purpose of the corporation is defined in terms of the benefits generated first for those rich enough to invest or own collective enterprises and second for those who act as their agents in the running of the company, ie senior managers. Where such differences of power, wealth and inequality were more muted and economic organisation retained a social purpose to improve the conditions of both insiders and outside stakeholders, the emphasis was on finding corporate forms that could facilitate cooperation across groups on the basis of shared objectives and interests (both inside the organisation and in the wider community, whether that is defined locally, regionally or nationally). Such forms could be cooperatives or other types of mutual ownership, which worked for the benefit of

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their members. Such forms could find a space inside national contexts dominated by the joint stock company but usually in specific niches such as cooperative retail stores, financial institutions aimed at the working class and in agriculture as ways to protect small scale farmers against exploitation by intermediaries and distributors of products. In the UK and the US, they seldom extended into mainstream manufacturing. In Denmark on the other hand we see a society where cooperatives and more recently industrial foundations (where majority ownership of a firm is vested in a body which has as its own purpose the serving of specific social ends) have spread throughout the key sectors of the economy and are now successful in highly competitive global markets, not just niche players. Because of their particular ownership structure, these corporations can allow themselves to be less short-term than shareholder driven corporations yet they are both highly innovative and competitive and focused on serving a ‘social’ purpose. How has this emerged and what does it suggest to the wider theme of reforming corporations?

II. Cooperatives During the initial formation of cooperatives in Denmark, there were a number of social groups who applied this model to their business. It was typically farmers that got together to form a local dairy, a regional slaughterhouse or an agrobusiness coop to sell their products and supply them with inputs to the farming process; consumers formed local retail coops; borrowers and lenders created mutual credit associations; workers formed commonly owned plants for the supply of bread, beer or apparel, or an insurance company for a certain grouping of people with similar risk profiles. During this initial phase, members were typically very active and took part in developing the coop under the principle of ‘one vote per head’, while dividends were distributed according to the volume of transactions that a member had with the coop. Shared ownership was highly present as members would bail out losses and annual general assemblies had to decide whether to continue or finish the operation of a coop. In Denmark villages transforming to railway towns formed cooperatives whenever they were in need of adapting to new technologies.2 A typical railway town in a farming region of Denmark, for instance, would likely form a dairy, a coop retail store, an agribusiness storehouse;

2  The literature in Danish on the cooperative movement is vast during the first decades of the t­wentieth century and some of the references to this literature can be found in Kristensen and Sabel (1997). However as the Danish development became an inspiration in other countries, some of this material was translated to English. Harald Faber translated and adapted for the British public a handbook (made by Hertel): Co-operation in Danish Agriculture (London, Longman, Green and Co, 1918). Justice Brandeis’ wife, Alice Brandeis, published a tract on Danish cooperative democracy: Democracy in Denmark Part II: The Folk High School (Washington, DC, National Home Library Foundation, 1936) as the Brandeis saw the Danish route as cure to some of the problems of American capitalism during the 1930s.

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a savings bank, an electricity power station, a freezing house, an assembly hall, a library and a technical school. The emergence of such institutions created a new space for growth for a highly differentiated set of craft-shops that could construct and maintain the modernising equipment within railway towns and the neighbouring district of farmers. In this way railway towns became highly responsive to new ideas implemented in neighbouring towns or its inhabitants would be inspired during stays in folk high school or national craft schools and The Technological Institute. These locations developed highly differentiated labour markets, where it was not only possible to access many different forms of crafts but also to cross class boundaries. Individuals could transform from a farm day-worker, by taking an apprenticeship and becoming a craft journeyman and ending up as the owner of a craft-shop or a manager for one of the local cooperatives. Cooperatives thus formed the basis for local economic prosperity and modernisation with limited inequalities and flexible boundaries between being an owner, a manager or a skilled worker (Kristensen, 1992). This was part of a broader emphasis in Denmark on self-help movements that formed proto-welfare state institutions for their members (such as technical schools, retirement schemes, building societies, different forms of health, unemployment and other forms of insurances among craft workers and craftsmen; folk high schools, research institutions, coops, saving banks and other credit institutions for farmers as well as trade unions). Direct deliberative democracy characterised such institutions, a tradition that was extended to all forms of industrial organisation as Danish employees were granted the right to establish work councils and elect representatives to boards of corporations. These institutions helped to give Danish industrialisation a distinctive trajectory where the provision of external finance from private banking institutions or the creation of limited liability companies were of low significance outside the largest towns. Instead industrialisation developed through forms of collective organisation and coordination that were embedded closely in local traditions of self-help and cooperation. Particularly crucial here was the strong position of craft workers in Danish firms and cooperatives. The crafts had defended their position by creating numerous local (multi-craft) technical schools linked to national craft-specialised schools, so that a decentralised labour market was governed by general and certified curricula that made possible mobility of the workforce to anywhere in Denmark. By 1907 this school system was crowned by a Technological Institute transferring new technologies to small firms, constantly updating curricula for existing crafts and developing new craft specialisation (eg electricians, car mechanics). In effect craft workers came to dominate industrialisation as their numbers expanded explosively, both as workers and as entrepreneurs. Even where large limited liability companies emerged, craft workers were predominantly employed and the use of large numbers of unskilled workers in the US Fordist model was seldom present. When international trade collapsed from the late 1920s until after World War II, many craft shops in railway towns compensated for the drop in demand from farmers and their coops by initiating the manufacturing of goods that could

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replace imports or innovated entirely new forms of products. Many of the most famous Danish companies, such as Bang & Olufsen, Lego, Danfoss and Grundfos, which later became important for the expansion of industrial foundations, were set up in small towns during this period. More generally this period gave impetus to the development of industrial districts around many of Jutland’s railway towns. These became home to the craft production competition model which evolved in Denmark where emphasis was given to the quality of products and processes and to continuous improvement and incremental innovation in sectors such as clothing, machinery, furniture and agricultural machinery (that would later transform to windmill production) (Kristensen, 1989; Kristensen, 1992). In contrast to some countries where such processes left semi-skilled and unskilled workers behind condemned to low level, low paid jobs in Denmark, these other groupings imitated this strategy by initiating their own schools and organising evening classes in new areas of technology to compete with skilled workers over jobs that had not already been fully colonised. Gradually, the unskilled succeeded in gaining increased state support, and from the 1960s onwards they created a nationwide system of special worker schools that could organise curricula and compete more fully with the craft workers’ technical schools. During the same period, craft workers were contesting the civil engineers by flocking to technicum engineering schools that visionary entrepreneurs originating from their rank and file had initiated. Thus, by the 1960s different groupings in Denmark were organised in different unions, associated with different schools, all engaged in a rivalry over qualifying their constituencies for whatever openings would show up in the labour market of specific industrial districts with new technologies, new organisational forms, etc (Kristensen and Sabel, 1997) This dynamic had an immense importance for the distinct Danish Business System, helping to create the focus on craft production of high quality manufactured goods. It pressurised firms to compete over reputation by recruiting highly recognised teams of workers and offering them job challenges; failure to do so would lead to workers moving to more interesting jobs at other firms with greater possibilities for skill development (Sabel, 1982; Sabel and Zeitlin, 1985; Whitley and Kristensen, 1996). In Denmark most employees left a job in exchange for a new one rather than being made redundant (Eriksson et al, 2006: 104). Even during periods of high unemployment, such as 1980, this number amounted to 200,000 whereas only 80,000 were made redundant by employers. Firms were in competition for labour but unlike other contexts, the competition was not determined by either the level of wages or the security the firm could offer; rather the key factor was whether the firm was able to offer rewarding work and good training opportunities. Thus the craft production competition model evolved not as a conservative force resisting changes in the work process but as a dynamic one, continually pushing the upgrading of skills and with this upgrading of products, processes and services, giving small, medium and large Danish firms a strong edge in the emerging global economy. Individual skilled workers or specialised male workers that wanted to pursue a career at work could find opportunities by shifting between work and

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vocational training institutions and by shifting job from one to another enterprise gradually building up a professional competence that made it likely that they could end up in a managerial or ownership position. In summary, the Danish process of industrialisation led to a particular pattern of organisations. Strong local associations with relatively limited class divisions in terms of status and wealth facilitated the creation of collective institutions that retained a strong sense of local identity and values of self-help and self-improvement. Economic activity was not divorced from social processes. Cooperatives and small firms grew up with a commitment to maintaining and building local institutions that reinforced patterns of prosperity and growth and this was reinforced by the central role of craft workers in the production process and their concern to work in firms which offered them the opportunity for self-improvement. This was reinforced by the way the Danish welfare state provided continuous retraining both to those in work and those out of work where benefit levels were set at a high replacement ratio to cover temporary periods out of the labour market whilst new skills were developed. The form of enterprises—cooperatives and small firms— meant there were limited numbers of absentee owners/rentiers living off their invested capital and pressing for short-term returns; instead, owners, managers and employees were embedded in specific social contexts where contributing to reproducing and developing local institutions was recognised as a crucial objective of the enterprises and local union representatives. Reputation for such activities and for offering employees interesting work and good training opportunities as well as contributing to local community institutions was an essential part of the model. Taking capital or employment out of the local districts was a negative in the Danish status order and therefore employers and employees worked together to sustain the industrial districts.

III.  Growth and Development of the Cooperatives and the Small Firms It is important that this system was able to evolve and change in response to new circumstances without losing its essential characteristics. Local cooperatives, for example, did not just stay local but formed second-level coops with other local cooperatives in order to receive benefits such as joint services and credits among local banks, centralised wholesalers for cooperative retail stores, joint wholesale organisations for farmers’ supply and sale of products. Danish farmers built a huge cooperative system for exporting high quality, branded products together with a complicated system for improving and controlling quality, eg raising output of milk per cow, adding an extra rib to pigs and improving favoured characteristics of seeds etc. These more complicated and more centralised forms of organisations gave the cooperative movement possibilities for forming enterprises that could compete with larger corporations with limited liability. Thus, members

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of cooperatives not only gained economically from dividends on their transactions with local coops, but also benefitted in turn from dividends received from the second-level cooperatives formed by their local cooperatives and also from the lower prices at markets that these organisations generated. And because coops at any level only paid out a fraction of their surpluses, decided on by their annual general assemblies, the coops could accumulate parts of their surpluses as provisions for further expansion. No absentee owner would draw out profits as dividends on shares. However, it is important to recognise that this did generate new tensions and problems. The process of forming coops among coops that again formed new enterprises and were run at a distance from and outside the competence of direct local producers came with a cost. The ability to construct local complementarities to a certain degree got lost, while democracy worked at a distance. Absentee membership of larger establishments within the cooperative movement became commonplace, giving managers a freer hand to make decisions that often looked similar to the ones made by managers of public stock owned corporations. ­Nevertheless, this process did mean that cooperative enterprises were able to grow into large corporation-like structures with a multiplicity of organisations within this structure. These larger structures emerged in diverse ways. The Danish-­ Swedish dairy-cooperative, Arla, seems to have expanded primarily through merging with dairies in Nordic, German and UK markets and to have offered farmers in acquired regions co-membership/ownership of the dairy-business so it became a cooperative of global reach. The agribusiness wholesale group, Danish DLG, is primarily owned by Danish farmers, who are benefitting from takeovers of foreign companies and cooperatives. A third version is Danish Crown, a conglomerate of slaughterhouses and food-processing plants of which some are cooperatives and others public corporations. In Denmark, these types of newly constructed cooperative multinationals have been made possible by incorporating certain parts of the group of companies on a limited liability basis, which in turn has made it possible for managers of the cooperatives to raise capital through bonds and shares (with very, very limited voting rights).3 Clearly this means that the challenge in such complex cooperatives is to manage and balance a multiplicity of stakeholders in a unified way, where all can see that their particular interests are looked after. Thus, whilst there has been an attenuation in the connection between local institutional structures and organisational forms, this has by no means disappeared. The cooperatives, even though they are often now multinational in scope, work for their members in a broad sense and have not lost control to actors lacking in any connection or loyalty to the localities and responding only to financial markets.

3  This information was collected by visiting the homepages of the mentioned cooperatives, where detailed information about founding ‘charters’, policies, democratic rules, etc. can be found. Our investigation made it clear that here is a very interesting subject to be investigated more carefully and we have found no source in the literature that has done this so far.

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In relation to the growth of small firms in Denmark, a different form of evolution has occurred but one that continues to defy the shareholder value driven logic of US and UK corporations. The essential innovation here has been the creation of industrial foundations as the means whereby the control of the company even as it grows in scale and international linkages remains closely connected and embedded in Danish society. There are over 1400 Foundations in Denmark employing around 100,000 people in Denmark itself plus 200,000 overseas; they constitute five per cent of domestic employment and eight per cent of private employment with a contribution to GDP of between five to 10 per cent (see Thompson, 2014; also, the website of the Industrial Foundation project coordinated by Steen Thomsen at Copenhagen Business School: http://www.tifp.dk/en/). Although Danish law on Foundations has changed over the years since the first foundation was set up—the Carlsberg Foundation in 1876—the core characteristics of the Foundation model in Denmark remain the same as spelt out by Thomsen (2012). They are: 1. Creation by donation: the founder gifts the foundation ownership rights to a business. 2. Independence: no owners and no members—self-owning and self-managing. 3. Governance by charter: specifies the philanthropic purposes of the Foundation, how it should act, be governed and represented on the company board. 4. Government and board supervision: the Foundation acts at its own discretion subject to its charter and supervision by government bodies. 5. The Foundation may be sole owner of a business or majority owner or it may control the corporation through a differentiated share structure where A-shares offer rights of control (and a majority are kept by the Foundation) and B-shares receive dividends and may be traded on the stock exchange. The creation of Foundations means that the companies which they own (in part or in whole) cannot be taken over. Foundations are therefore relatively simple ways in which founders can ensure the continuity and stability of both their companies and their connection to Danish society, a form of ‘patient capital’ (often called ‘responsible ownership’ in the founding charters) that does not rest on the necessity of a particular model of banking (as in the German case) but rather on the careful stewardship of the company exercised by the independent Foundation. Such Foundations are granted certain tax-reductions dependent on how the charter specifies the distribution of profits between the various levels in the corporate group and the general good as defined in the Foundation’s charter. Thomsen’s analysis of the Danish foundations broadly points to these advantages as surviving over time (Thomsen, 2012). In this respect, it is worth noting that many of the largest and most dynamic Danish companies such as Novo Nordisk, Maersk, Grundfos, Danfoss, LEGO, Velux, Bang and Olufsen (through the Færch Foundation) are controlled by Foundations. It is also important that the Foundation structure has three broad effects. In brief, these are first, through its contribution to ‘patient capital’, it supports Danish

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firms engaging in long-term research and development as well as investing directly and indirectly in maintaining the quality of skills and training institutions essential to the Danish business system. Second through its own philanthropic activities as well as encouraging its associated companies to think broadly about stakeholders, it maintains the commitment to Denmark’s social and economic development broadly conceived. Third it encourages Danish multinationals controlled by Foundations to consider the impact of their presence in different countries (especially emerging economies) in line with a commitment to working for social as well as economic development and engaging with (and even helping develop) stakeholder communities. Examples of these processes are widespread both in Denmark and in Danish multinationals working overseas. In 2009, for example, Maersk announced closure of its shipyard north of Odense in Denmark. The closure was predicted well in advance and lay-offs came gradually as the yard was finishing the last orders on new ships in 2012. The AP Møller Foundation owns more than 50 per cent of the voting shares in AP Møller—Mærsk A/S and two other foundations have smaller, but significant holdings. Mærsk which is a lead member in the UN Global Compact league of firms, initiated the usual (in the Danish context) retraining and re-employment initiatives, but it also invested 200 million DKK in preparing the shipyard, which had facilities that were previously used to build huge container ships, to become an industrial park. Even before the plant closed, another small shipyard had moved to the facilities, and a development and research institution, Lindoe Offshore Renewable Center (LORC), had been established, in part financed by the Maersk family foundation, with board members from the wind turbine industry and offshore industries, and chaired by a former Social Democrat prime minister. By the end of 2013, 68 firms had established themselves at the park, 1,200 jobs had been created, and the park had become a key centre for producing very large wind turbines, novel forms of foundations for deep-sea windmills, and other large scale steel constructions. Today the activities at the site are probably much more promising than they were 10 years ago, though the present employment, 1,300, is only a third of the previous level. In 2013, Maersk sold the facilities to Odense Harbour for 300 million DKK, which was probably only a fraction of its worth. In this way, the park has become an instrument for local economic development. Mass production of sea windmills and their jacket foundations may never become established at the park, but the facilities make it possible to make prototype ‘zero’ series models, have them tested, and develop industrial processes that can later be employed in countries closer to the market or with access to cheaper labour costs. So, in many respects, Danish green tech industries were given a site that was ideal for developing the next technological leap toward making green energy cost-competitive compared to fossil fuels.4 One of the most remarkable 4  The story of Maersk is based on a series of Google articles, primarily in Danish. The LORC homepage www.lorc.dk/ contains information on the new green-technology activities, firms associated to the park and how the board is constituted today.

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aspects of Maersk’s way of handling the plant closure was that preparations for the closure of the Maersk facility and for its replacement by a more diverse model of economic activity began simultaneously at the time of the announcement in 2009. Other firms were from early on invited to take over some of the facilities of the yard. Simultaneously, Maersk organised schemes for retraining, helping employees find new jobs and taking a very active role in making the yard a host of new activities for other firms. These steps were taken long before protesters and political circles got involved. Probably this occurred as a result of being both embedded in an implicit, and having simultaneously formed an explicit, offensive corporate social responsibility strategy. A large proportion of the charters that set the framework for these foundations directly emphasise and set up particular grants to support the further education of employees, and their family of firms often play a key role in advancing educational institutions. Through this behaviour they reinforce the dynamic of skill acquisition that is so deeply ingrained in the Danish society and which has enabled a broad spectrum of Danish firms to develop advanced forms of work organisation and new business models, even if and after they have been taken over by foreign multinationals, and exposed to the pressure from financial institutions and shareholder dominance (Kristensen, Lotz and Robson, 2011). These sorts of development are not confined to Denmark itself. Such engagement overseas by Danish companies is often associated with complicated negotiations and the creation of a field of supportive local stakeholders (financial institutions, ICT companies, local and national authorities, local interest groups, etc); it demands a long term view, where profits come late and with risks. A good example of how complicated such engagements are is the route that the Danish multi-national corporation (MNC), Danfoss, in association with the engineering consultancy firm, Cowi, had to take before it could sign the Anshan (China) district heating system contract in 2013 which won it the Greentech Award in 2014.5 The project will supply 1.8 million people with warm water in a district heating system that makes use of waste-heat at factories (particularly the local steelworks), combining it with alternative energy-sources and the district heating system that engages several district heating operators. It uses intelligent hard- and software to control and balance the whole integrated system so effectiveness in terms of robust heat-supply, energy-saving, reduced pollution and lowering of CO2 emissions can be achieved. Though the project has cost many billions, its payback period is expected to be only three years. This project has not come about quickly. In 2007 Danfoss engaged in its first joint venture in Anshan, established a factory producing district heating substations in 2008, started to create contacts to heating suppliers, local politicians and began working together with other Chinese suppliers of parts to heating systems.

5 www.districtenergy.org/blog/2014/05/12/danfoss-wins-greentec-award-2014-for-chinese-wasteheat-recovery-district-heating-solution.

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During this period, Danfoss engaged in close cooperation with Anshan City ­Government, Angang Steel and Qianfeng District Heating Company. The preparation of the contract went on from 2011 until 2013 and engaged both a party secretary and a presidential visit to Denmark before the contract could be signed, a process during which the energy-saving systems in Denmark could also be demonstrated and documented. In a way Danfoss had to make the infrastructural ecosystem visible and also bring the potential ecosystem of the Chinese field of stakeholders together to make the project imaginable.6 The project has far reaching consequences for the environment and city life and reflects a maturation of many years of investment in control- and monitoring technologies informed by the broad perspective on the responsibility of firms that exists within Danfoss itself and the local home-district it has participated in forming. Simultaneously it activates and benefits a multiplicity of firms and institutions in Denmark that can work on such integrated systems, thus creating a form of co-development between China and Denmark, where numerous companies across different countries and localities can be combined in large scale projects for sustainable development. Another example of this is how Novo, the pharmaceutical company with a specialism in insulin and diabetes treatment, has worked in China and other Asian countries such as Bangladesh and Indonesia to create educational programs for pharmacists and awareness campaigns and training of patients. Novo A/S is a holding company wholly owned by the Novo Nordisk Foundation. Novo A/S in turn owns shares in Novo Nordisk A/S and Novozymes A/S. According to its website (http://novonordiskfonden.dk/en/content/ownership-and-subsidiaries), at the end of 2015, Novo A/S owned A (multiple voting rights) and B (ordinary) shares in Novo Nordisk A/S equivalent to 27 per cent of the share capital and 74.5 per cent of the votes and A and B shares in Novozymes A/S equivalent to 25.5 per cent of the share capital and 70.7 per cent of the votes. The A (multiple voting rights) shares in the two companies are unlisted and are not traded. In both Novo Nordisk A/S and Novozymes A/S, the A shares have voting rights that are 10 times greater than those of the B (ordinary) shares. Its direction is therefore set by the Foundation through its control of the holding company even though there are external shareholders. The strategy pursued has been to set up a whole set of strategic partnerships with various actors in the field of diabetes in emerging economies: policy makers, local manufacturers, healthcare providers and of course patients. In China, for example, It … earned the trust of the Chinese government by delivering quality products and being involved in sponsoring national prevention campaigns … It … increases the awareness of diabetes in rural China and other remote areas which have little or no access … to healthcare professionals to inform them … and screen the disease’s incidence … (Chitour, 2013:39).

6 

See the file on The Anshan Project on www.lsta.lt/lt/events/view/470.

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By 2013 55,000 doctors had participated in series of seminars and conferences, and 280,000 patients had been educated since 1997 (ibid). Novo Nordisk A/S has applied a similar approach in Bangladesh, but given that the national legacy and the institutional context are different, the company followed a different route. It focused more on helping an NGO which supported diabetes patients and sought to improve the governance of the healthcare system as a whole, educating doctors, subsidising medicine for low income groups and setting up a logistics system for distributing medicine that would not jeopardise quality.7 Recently, Novo ­Nordisk has engaged itself in a similar way in Brazil and Indonesia. Girschik (2014) has documented how Novo Nordisk activates foreign educators and the World ­Diabetes Foundation to empower a professional organisation of doctors and the University of Indonesia so that they are able to improve the regulatory capabilities of the government and in this way, improve early discovery and early treatment of diabetes patients. By making periodic assessments of the emerging system’s ability to improve on making early detection, improved diagnostics and correct treatment of patients, Novo Nordisk is able to assess the progress, identify problems and help advise patient organisations and professional organisations, and through them health authorities, to improve the entire health system. Danish Foundations provide a framework within which firms can legitimately and effectively engage with social issues, maintaining and building institutions both in Denmark and overseas. This reflects the long-term embeddedness of ­Danish enterprises in the social order and their resistance to being reduced to economic instruments for the benefit of absentee shareholders.

IV.  Discussion and Conclusions We have shown that Danish cooperatives and firms owned by industrial foundations have become highly competitive and innovative in traditional market terms but also shown a willingness to engage both at home and overseas in seeing the social purpose of their organisation. This reflects how Danish society industrialised through a combination of cooperatives, small firms and skilled craft workers that maintained the local roots of many organisations and created a co-dependence between economic and social development where extremes of wealth and inequality were mitigated by a focus from all groups and their trade union and political representatives on education and training as routes to autonomy, reputation and status as well as income. The result was a drive towards firms which were innovative and willing to allow employees to use their discretion and autonomy to improve production and also contribute to improving society. Because many of

7 See www.novonordisk.com/images/Sustainability/PDFs/Blueprint%20for%20change%20-%20 Bangladesh.pdf.

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these organisations were cooperatives or owned by industrial foundations, there was an absence of shareholder pressure to produce quick returns and to cut out expenditure on training and development or on social purposes. What lessons does this hold for current debates about corporate form? Most obviously, the idea that there is only one efficient form of organising collective economic activity and that it corresponds to the shareholder driven model of the limited liability firm is a powerful myth but it is inaccurate. Danish coops and firms run by industrial foundations are highly successful in global markets and they also clearly retain a social purpose as well as an economic one. In the UK, this myth has led to a dismissal of alternative organisational forms as aberrant and ineffective even in a context where the shareholder driven firm has been behind many scandals in relation to work conditions, environmental standards, inequality of pay etc and has been central to the genesis of recent financial crises. Exceptions to this rule such as the John Lewis Partnership or the Scott Bader Commonwealth show that it is not impossible for cooperatives that have a social purpose to develop in the UK. However, as the decline of mutualism in the building societies and insurance companies shows, the context is not favourable. Efforts to tilt the balance in the UK more towards these structures through developing new corporate models such as the Community Interest Corporation or the B-Corp (Benefit corporation where social and economic objectives are ranked equally) may open up some new possibilities.8 However, organisational forms fundamentally reflect social contexts and where that context remains characterised by deep inequalities and class divisions, there is only likely to be marginal adjustments to the dominance of the shareholder driven firm. It is therefore no surprise that as societies have become more unequal (Piketty, 2014), shareholder driven firms have become more significant. Our discussion of Denmark has emphasised a number of key points. First the structure of corporate forms arises out of a social context and where that context is highly unequal, it is likely that unequal corporate forms benefitting the rich and powerful will arise. Where the context is less unequal and more consensual, then other corporate forms will emerge that will be concerned more with their role in the wider community. In the Danish context, this explains the particular and continued importance of both cooperative structures and Foundation-led companies. The power of the original context to support the development of craft-based skills as a way to develop long term processes of innovation and improvement further mitigated the development of extreme forms of inequality and even provided highly successful entrepreneurs and their families the opportunity to focus on their reputation as much as the generation of wealth. These families created Foundations with philanthropic purposes that provided a shelter from short-term considerations to the firms in which they held dominant ownership. Instead they

8 

See Hunter, ch 13 and Boeger et al, ch 20 in this volume.

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have been steadily able not just to support Danish social development but also to take a leading role in certain forms of institution building in emerging economies. In this paper, we cannot claim to have provided a definitive account that shows they do this to a greater extent than firms from other economies but we feel that our illustrations make a compelling case for further research. On the other hand, we also recognise that our argument does depend on a form of path dependency in Denmark which goes back in part to the early industrial period if not before. However, we are not proponents of institutional determinism; on the contrary, we show in our discussion of the evolution of Danish society that there were always moves going on by social actors to improve their position and change aspects of institutions. So whilst it would be naïve to assume that organisational models from Denmark can simply be transferred to other contexts such as the UK, what can also be learnt is that through political struggle institutions can be remade.9 Going beyond isolated examples of successful cooperative forms like the Scott Trust (which owns the Guardian), the John Lewis Partnership and the Scott Bader Commonwealth is only likely to occur as broader inequalities at work and in society more generally are challenged. By challenging the hegemonic myth of the shareholder driven corporation itself (Stout, 2012) and showing that other organisational forms can be at least as innovative and competitive whilst still having a social purpose, it should be possible to open up the debate on the diversity of possibilities available in the corporate landscape. One place to start in countries where the limited liability company is dominant is to take the founding charter more seriously. Limited liability is a privilege granted by the state, and originally came with specifications concerning purpose, governance, responsibilities towards internal and external stakeholders, etc formulated in the charter. It also used to come with rules of periodic reviews, assessments and renegotiations, where the state authority had to decide whether the privilege should be continued or terminated. Corporate law in the UK has been reformed recently and the obligation towards other stakeholders has been explicitly stated.10 However, this change of law has only had limited effects (Corporate Reform Collective, 2014). A next step could be to reemphasise the debates arising from the discusssions about (the Transatlantic Trade and Investment Partnership (between the US and the EU) and the Trans Pacific Partnership (between the US and a number of Asian economies, excluding China) both of which are now in the bin, thanks to the Trump administration) and the recently approved Canada-EU Treaty (CETA). These discussions have included rules allowing corporations to sue national governments under the Investor-State Dispute Settlement procedure where they can show that governments have caused them a loss (on TTIP see De Ville and Siles-Brügge, 2015). Paradoxically governments lack a similar institutional channel to challenge

9 

10 

See Boeger, ch 10 in this volume. See s 172 UK Companies Act 2006.

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companies when they act in ways that are detrimental to broader social welfare but are within the law, eg tax avoidance strategies, engaging in ­certain ­environmental despoliations etc. Taking charters seriously and insisting that companies obtain licences for certain activities where social obligations are made explicit may provide the beginnings of new institutional mechanisms that could make governments and other stakeholders more equal to shareholders (see eg the proposals on licensing in the ‘foundational economy’ developed in Bentham et al, 2013; Bowman et al, 2014) and could over time turn companies into development agencies for the benefit of society.

References Bentham, J et al (2013) Manifesto for the Foundational Economy CRESC Working Paper No 131, University of Manchester available at www.cresc.ac.uk/ medialibrary/workingpapers/wp131.pdf. Bowman, A, Froud, J, Johal, S and Williams, K (2014) The End of the Experiment?: From Competition to the Foundational Economy  (Manchester, Manchester University Press). Campbell, JL, Hall, JA and Pedersen, O (2006) National Identity and the Varieties of Capitalism: The Danish Experience (Montreal, McGill-Queen’s University Press). Campbell, JL, Hollingsworth, JR and Lindberg, LN (1991) Governance of the American Economy (Cambridge, Cambridge University Press). Chandler, AD (1977) The Visible Hand (Cambridge MA, Belknap Press). Corporate Reform Collective (2014) Fighting Corporate Abuse. Beyond Predatory Capitalism (London, Pluto Press). Davis, GF (2009) Managed by the Markets: How Finance Re-Shaped America (Oxford, Oxford University Press). De Ville, F and Siles-Brügge, G (2015) TTIP: The Truth about the Transatlantic Trade and Investment Partnership (Oxford, Polity Press). Djelic, ML (2013) ‘When Limited Liability was (Still) an Issue: Mobilization and Politics of Signification in 19th-Century England’ 34(5–6) Organization Studies 595–621. Djelic, ML and Quack, S (2007) ‘Overcoming Path Dependency: Path Generation in Open Systems 36(2) Theory and Society 161–86. Ireland, P (1999) ‘Company Law and the Myth of Shareholder Ownership’ 62(1) Modern Law Review 32–57. —— (2010) ‘Limited Liability, Shareholder Rights and the Problem of Corporate Irresponsibility’ 34 Cambridge Journal of Economics 837–56. Kristensen, PH (1992) ‘Industrial Districts in West Jutland, Denmark’ in F Pyke and W Sengenberger (eds), Industrial Districts and Local Economic Regeneration (Geneva, ILO).

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—— (1989) ‘Denmark: an Experimental Laboratory for New Industrial Models’ 1(3) Entrepreneurship & Regional Development 245–55. —— (1994) ‘Strategies in a Volatile World’ 23(3) Economy and Society 305–34. Kristensen, PH and Morgan, G (2012) ‘From Institutional Change to Experimentalist Institutions’ 36(S1) Industrial Relations: A Journal of Economy and Society 413–37. Kristensen, PH, Lotz, M and Rocha, R (2011) ‘Denmark: Tailoring Flexicurity for Changing Roles in Global Games’ in PH Kristensen and K Lilja (eds), Nordic Capitalisms and Globalization. New Forms of Economic Organization and Welfare Institutions (Oxford, Oxford University Press). Kristensen, PH and Sabel, CF (1997) ‘The Small-holder Economy in Denmark, the Exception as Variation’ in CF Sabel and J Zeitlin (eds), World of Possibilities. Flexibility and Mass Production in Western Industrialization (Cambridge, Cambridge University Press). Mayer, C (2013) Firm Commitment: Why the Corporation is Failing us and How to Restore Trust in it (Oxford, Oxford University Press). Morck, RK (2007) A History of Corporate Governance around the World (Chicago, University of Chicago Press). Morgan, G and Sturdy, A (2000) Beyond Organizational Change (London, Palgrave MacMillan). Parker, M, Fournier, V and Reedy, P (2007) The Dictionary of Alternatives (London, Zed Books). Piketty, T (2014) Capital in the Twenty-First Century (Cambridge MA, Belknap Press at Harvard University Press). Sabel, CF (1982) Work and Politics: The Division of Labor in Industry (Cambridge, Cambridge University Press). —— (1997) ‘Design, Deliberation, and Democracy’ in KH Ladeur (ed), Liberal Institutions, Economic Constitutional Rights, and the Role of Organizations (Baden-Baden, Nomos Verlagsgesellschaft). Sabel, CF and Cohen, J (1997) ‘Directly Deliberative Polyarchy’ 3(4) European Law Journal 313–40. Sabel, CF and Zeitlin, J (1985) ‘Historical Alternatives to Mass Production: Politics, Markets and Technology in Nineteenth-century Industrialization’ 108 Past & Present 133–76. Schneiberg, M (2007) ‘What’s on the Path? Path Dependence, Organizational Diversity and the Problem of Institutional Change in the US Economy, 1900–1950’ 5(1) Socio-Economic Review 47–80. Schneiberg, M, King, M and Smith, T (2008) ‘Social Movements and Organizational Form: Cooperative Alternatives to Corporations in the American Insurance, Dairy, and Grain Industries’ 73(4) American Sociological Review 635–67. Stout, LA (2012) The Shareholder Value Myth: how Putting Shareholders First Harms Investors, Corporations, and the Public (San Francisco, BerrettKoehler).

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Thomsen, S (2012) ‘What Do We Know (and Not Know) about Industrial Foundations?’ (available from Centre for Corporate Governance, Copenhagen Business School: www.tifp.dk/wp-content/uploads/2011/11/What-Do-WeKnow-about-Industrial-Foundations.pdf). Veldman, J (2013) ‘Politics of the Corporation’ British Journal of Management Vol 21: Supplementary issue 1: S18–S30. Whitley, R and Kristensen, PH (1996) The Changing European Firm: Limits to Convergence (London, Routledge).

15 What’s in a Name? Reflections on the Marginalisation of the Co-operative as an Organisational Form ANITA MANGAN

I. Introduction Academic interest in co-operatives seems to be coming back into fashion in the UK, possibly in response to the financial crisis of 2007–08 and to the belief that global capitalism and austerity are not working (Cheney et al, 2014). Indeed it would seem that co-operatives have been going from strength to strength in recent years, with almost 7,000 co-operatives, spread across all sectors, contributing over £37 billion to the UK economy (Mayo, 2015). For those of us who study co-­operatives and subscribe to co-operative principles and values, this is good news and yet I wonder whether the robust figures mask a deeper problem? Far from growing, is it possible that the co-operative as an organisational form might have peaked and be beginning to decline? This chapter explores the rise of social enterprise and asks whether co-operatives risk becoming marginalised as general knowledge about co-operatives wanes. It explores the differences between co-operatives and social enterprises as organisational forms, arguing that while both contribute to the common good, co-operatives have additional and important benefits based on the principles of education and training for members, co-operation among co-operations and concern for the wider community. The chapter begins with two vignettes that were the inspiration for this paper. These are followed by an analysis of 10 years of published research on social enterprises and co-operatives (2006–16). The chapter then compares social enterprise and co-operatives in terms of definitions, objectives and wider social ­values. It argues that while both have the potential to promote social justice,

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only co-operatives offer a radical alternative to market capitalism. The chapter concludes by calling for a renewed awareness campaign to promote co-operatives as a form of social innovation.

II.  Finding Funding for Co-operative Research: Two Vignettes My interest in this topic began as a result of attending two sandpit events to try to get co-operative research funded. Sandpit funding events are intensive, facilitated, medium-sized gatherings held over a two or three day period. During a sandpit, the facilitator creates opportunities for people to move between groups, pitch and discuss ideas and find like-minded researchers. The first funding event (July 2014) was themed around community participation and prioritised interdisciplinary, mixed-methods research that focuses on the community (broadly defined). There were approximately 40 researchers at the event, representing a wide range of disciplines such as English literature, history, media studies, music, medicine and business. As a management scholar, I felt vaguely out of place at the event, but reassured myself that my interest in community co-operatives, volunteers and social justice would be enough to create common ground with the other academics interested in community research. Although many were quite happy to discuss the idea of co-operation, a typical response was ‘sounds interesting but I don’t know anything about co-operatives’. The second sandpit, 18 months later, was themed around social innovation and was not confined to academics. Participants simply had to have an interest in social innovation. This led to an interesting mix of people, half of whom were academics and half were practitioners. Again the disciplinary range was broad, with the academics coming from fields as diverse as business, design, architecture, geography and technology. Practitioners came from charities, media organisations, business and social enterprises. We were given two minutes to write a 50 word introduction about our interests. The short introductions were then used to prompt an introductory conversation with other participants. My introduction was as follows: How do communities’ ideas/problems get heard? How do we make sure that all voices are equally valued? I’m interested in mutual self-help, co-operation and social justice— animating communities using experiential drama to discover new possibilities and narratives. The more co-operation and self-help, the better!’

Although the introduction contained multiple ‘key words’ associated with co-operative research, every participant I spoke to replied with a variation of ‘You mean social enterprises? Yes, they’re great’. But are co-operatives and social enterprises the same thing? Had I missed a vital development? Or was something more subtle going on? Both events had participants who specialised in ­community

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research and social innovation, but these experts were either unaware of co-operatives as an organisational form, or conflated them with social enterprises. This prompted a question about whether general knowledge about co-operatives is in decline. In one way, unfamiliarity about co-operatives as an organisational form should not be too surprising and there are at least three issues that lead to the ­marginalisation of co-operatives. First, alternative organisations often suffer from invisibility (Rodgers et al, 2016; Novkovic, 2008) in the broader business world; organisational history and commemoration is a political process that most often focuses on capitalist narratives, with alternative histories becoming side-lined. As Rodgers et al (2016) note, powerful organisations are successful in marginalising and overshadowing alternatives. This is reflected in media reports on business and financial news; coverage of for-profit, mainstream perspectives organisations is the norm (Berry, 2016, 2015) and alternative forms of organising are usually only covered when there is a failure or scandal. Moreover, following the transformation of the UK’s financial sector in the 1980s (Morgan and Sturdy, 2000) and demutualisation of building societies, the general public are less aware of the meaning of mutuality as an everyday, practical concept because building societies have disappeared from the UK high street. Given that co-operative retailers trade with non-members, this further reduces the public’s general knowledge about the co-operative as an alternative organisational form. A second point relates to academic research into co-operatives, which often comes in waves as new generations of academics ‘discover’ co-operatives.1 While co-operatives are a constant feature of international development research, they have been less visible in organisational research, particularly in the UK. One possible explanation is that there has been a homogenisation of perspectives on organisational forms as research has moved from the social sciences into business schools (Grey, 2009) and financial expertise has become increasingly specialised (Bryan et al, 2012), meaning that the range of topics researched and taught to students has narrowed. Moreover, economic literature often struggles to account for collective activities, because notions of altruism and gift-giving do not correspond to rationalist economic models. When the economics literature does focus on co-operatives, it either debates the ‘degeneration thesis’ or concentrates on worker co-operatives, ignoring the wider variety of member-owned or consumer co-operatives (Novkovic, 2008), thus implying that co-operatives are a niche concern. This serves to ‘hide’ the popularity and success of co-operatives. Finally, although business studies and management are among the most popular courses in higher education, particularly at postgraduate level, with a few small exceptions,

1 

See also Boeger, ch 10 in this volume.

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business students are not routinely taught about alternative modes of organising (Grey, 2002; Ehrensal, 2001; Mangan, 2014). Taken together, it could be argued that these developments have served to reduce the general knowledge about co-operative modes of organising.

III.  Research Trends: The Contrasting Fortunes of ‘Social Enterprises’ and ‘Co-operatives’ As an organisational studies scholar, specialising in co-operatives, my interest has been to discover possible trends in co-operative research in order to determine whether the existing academic research supports my suspicions about the decline in knowledge about co-operatives. I began by conducting a review of academic articles on co-operatives and social enterprise, to see if there was evidence to support my question. The field of alternative organisations is an expanding one with new formats such as Community Interest Companies (CIC) and B Corps emerging in recent years, as people re-imagine corporate governance and social responsibility. Academic research is lagging behind these developments however and there are relatively few peer-reviewed articles published on these newer forms.2 For this reason, I concentrated my search on co-operatives and social enterprise. To review the differences in emphasis, I conducted a search on the Web of ­Science (http://wok.mimas.ac.uk/) covering 10 years (2006–16). For each search, I noted the total number of articles, then filtered the results by ‘social sciences’, ‘business economics’ and finally by ‘article’. This was to get a broadly based picture of the social science research, the specific organisational/business studies research and the number of articles (as opposed to other documents such as book reviews). As different definitions, meanings and spellings abound, I experimented with different search terms and combinations for both ‘social enterprises’ and ‘co-operatives’. Furthermore, the results are approximate; new material is being added to the database continually and searches done at different times on the same day often produce slightly different results. Therefore, the tables below are approximate rather than exact. First I searched for the phrase ‘social enterprise’ as the topic, and then as the title. A search on ‘social entrepreneurship’ produced a different set of results, so I combined the two terms. Note that the totals for ‘social enterprise’ and ‘social entrepreneurship’ do not neatly add up to the ‘both’ column; this is because a number of articles use both terms interchangeably. Table 1 shows the results of this search.

2 

But see Hunter, ch 13 and Boeger et al, ch 18 in this volume.

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Table 1:  Social enterprise / entrepreneurship (based on Web of Science data, accessed June 2016) Social Enterprise

Social Entrepreneurship

Both

TOPIC / filters

16,450

10,878

25,425

Social sciences

10,178

9,293

17,808

Business economics

5,597

5,789

10,256

Article

2,601

2,933

6,213

TITLE / filters

1,516

1,211

2,664

Social sciences

1,123

1,105

2,171

Business economics

564

842

1,363

Article

370

543

884

Focusing solely on academic articles, we see that approximately 6,200 papers have been written about either social enterprise or social entrepreneurship in 10 years, with almost 900 papers using one or other of these phrases in the title. From these figures, we can see that 29 per cent of all articles written about social enterprise/ entrepreneurship are based in the business economics area, while 33 per cent of them have one of those terms in the article title. In both cases, business economics research accounts for roughly 60 per cent of the social sciences research on social enterprise. Running a search on ‘co-operatives’ is more difficult, as the phrase can be spelled with or without a hyphen. For example, a search using ‘cooperative’ as the key term produced 212,711 results, but the majority of these were in the fields of science, medicine and psychiatry where the term ‘cooperative’ is used as a variable or to describe scientific reactions, particularly in the US. Therefore, the search was modified and the plural form was used. This produced fewer scientific and medical texts, so the final search used the terms co-operatives, cooperatives, worker cooperatives and community cooperatives. The search followed the same filtering process previously used for social enterprise/entrepreneurship. It produced the following results (see Table 2). Table 2:  Co-operatives / cooperatives (based on Web of Science data, accessed June 2016) Co-operatives

Worker co-operatives / cooperatives

Community co-operatives / cooperatives

Co-operatives + cooperatives

TOPIC / filters

6,782

1,652

510

5,344

Social sciences

1,046

1,169

377

2,294 (continued)

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Table 2: (Continued) Co-operatives

Worker co-operatives / cooperatives

Community co-operatives / cooperatives

Co-operatives + cooperatives

Business economics

413

332

150

1,256

Article

332

301

133

1,072

TITLE / filters

954

62

27

990

Social sciences

331

47

23

764

Business economics

170

34

12

498

Article

137

31

12

418

There are slightly over 1,000 papers on co-operatives/cooperatives, with 418 papers using either phrase in the title. Interestingly, worker co-operatives are more popular than community co-operatives in business economics research papers, possibly because they represent a more clear-cut example of organisation or work. It is also clear from the basic search that co-operatives are a less popular topic in business economic research than social enterprise and social entrepreneurship. Table 3 shows the differences between them. Table 3:  Comparison of social enterprise / entrepreneurship and co-operatives (based on Web of Science data, accessed June 2016) Social enterprise & social entrepreneurship

Co-operatives & cooperatives

TOPIC / filters

25,425

5,344

Social sciences

17,808

2,294

Business economics

10,256

1,256

Article

6,213

1,072

TITLE / filters

2,664

990

Social sciences

2,171

764

Business economics

1,363

498

884

418

Article

The figures suggest that approximately twice as many articles have titles about social enterprise/entrepreneurship, while articles on that topic outnumber those on co-operatives/cooperatives by approximately 6:1. These are broad, approximate

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figures and they only represent results generated at a single point in time. Interestingly, however, when the search is repeated, the co-operative numbers remain relatively static but the figures for social enterprise and social entrepreneurship vary considerably and usually show an increase. This indicates a marked interest in social enterprise and social entrepreneurship (Haugh, 2007, 2012); albeit one that is relatively recent (Dacin et al, 2011). This suggests that social enterprise is enjoying a wave of popularity in academia, while co-operatives remain a special interest topic with a relatively stable set of researchers in the field. In one sense this is not surprising, because enterprise has long been a topic of interest in management studies and placing the word ‘social’ before it is a useful way to introduce non-profit or alternative types of organising into business and economics studies, an area that in the past has been dominated by quantitative, functionalist research. Moreover outside academia, social enterprises have become highly visible thanks to political and media support, as well as increased consumer concerns about ethical and sustainable trade (Dacin et al, 2011; Haugh, 2007; Teasdale, 2012).3 A final comparison based on citation numbers highlights the growing popularity of social enterprise over co-operatives. The citation tables are based on the Web of Science citation reports, which track citations for individual published articles and collate them into annual totals. Table 4 shows the annual citations using co-operatives and social enterprises as topics. Table 4:  Citations based on topic 2006–16 (based on Web of Science data, accessed June 2016) 9000 8000 7000 6000 5000 4000 3000 2000 1000 0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Co-ops

3 

See also Gregory, ch 17 in this volume.

Social enterprise

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There were 31,092 citations in total for social enterprise and social entrepreneurship in the topic, while there were 2,461 citations in total for co-operatives and cooperatives. Citations are increasing year on year for both topics, but those for social enterprise far exceed co-operatives. In both 2014 and 2015, for example, there were approximately 12 times as many citations for social enterprise topics as there were for co-operatives (6244:518 in 2014 and 7709:650 in 2015). Moreover, in the first six months of 2016, citation levels for social enterprise had equalled those for 2011 (2,568 in 2011 and 2,716 in the first six months of 2016). A similar pattern emerges when you examine citations by title. There were 4014 citations in total for social enterprise and social entrepreneurship in the title. The equivalent figure for co-operatives and cooperatives was 714. There were nearly five times as many citations for social enterprise in 2014 (799:166) and over four times as many in 2015 (906:210). Table 5:  Citations based on title 2006–16 (based on Web of Science data, accessed June 2016) 1000 900 800 700 600 500 400 300 200 100 0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Co-ops

Social enterprise

As previously argued the emergence of a wider set of socially-engaged organisational forms offers increased opportunities for positive change in society, including developments such as communitarian forms of governance (Ridley-Duff 2007, 2010 and in Chapter 16 in this volume) and employee ownership models (Erdal, 2011 and Chapter 11 in this volume). Organisational forms are ideal types; in practice they are rarely found in a ‘pure’ form as the degeneration debates about co-operatives would indicate (Storey et al, 2014). Rather than discuss individual successes or failures, however, this chapter is interested in the broader implications for the growing popularity of social enterprise in academia. In particular, does the current academic enthusiasm for social enterprise research create a longer-term

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problem for those of us who are interested in co-operative principles? Is there a danger that the ‘fashionability’ of social enterprises could lead researchers to assume that they are unequivocally positive in their effects (Dacin et al, 2011)? Could social enterprise researchers be indulging in utopian thinking (Parker, 1998) because the field is relatively new? In short, what effect (if any) could this have on research into co-operatives? The next section focuses on social enterprise, considering the breadth of definitions, objectives and wider social outcomes.

IV.  Social Enterprises as Alternative Modes of Organising Within organisational studies, defining social enterprise is a problematic exercise as there is much uncertainty about the term (Mair and Martí, 2006; Teasdale, 2012). Research is fragmented and atheoretical (Dacin et al, 2011) and researchers either take the benefits of social enterprise for granted or are reluctant to criticise an organisational form that is generally understood as providing a common good (Dey and Steyaert, 2012; Dey et al, 2016). A general definition is that social enterprise includes new products, services or organisations intended to stimulate social change or meet social needs (Mair and Martí, 2006; Corner and Ho, 2010; Haugh 2012). In contrast, social entrepreneurship can be defined looking at the individual social entrepreneur, their operational context, processes and overall mission (Dacin et al, 2011; Mair and Martí, 2006). While these seem broadly unproblematic, definitions become more complicated when one has to decide whether a social enterprise is an individual or collective pursuit. For example, many argue that visionary individuals are at the heart of social enterprise (Dacin et al, 2011; Mair and Martí, 2006; Zahra and Wright, 2016), with a less common definition prioritising stakeholder support and collective action (Corner and Ho, 2010; Haugh, 2007; Montgomery et al, 2012). Partly this could be because social enterprise literature focuses on the role of a single individual, while neglecting the wider network of people who contribute to the single entrepreneur’s success (Novkovic, 2008). Teasdale (2012) argues that the distinction between individual and collective actions can be split between the United States and Europe; the former is more likely to be an individual undertaking, while the latter is more likely to include collective endeavours. In common understandings of social enterprise, however, it is usually assumed that social enterprises are small, individual endeavours. At the other extreme, social entrepreneurship can be analysed under the broader label of enterprise as a specific category where individuals set up companies in response to ‘opportunities derived from society problems’ (Zahra and Wright, 2016: 614). This definition highlights the centrality of for-profit notions of entrepreneurial creativity, innovation and the ability to recognise an opportunity (Corner and Ho, 2010). It also points to

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the hybridity of social enterprises as they can accommodate both financial gain and social outcomes and suggests a somewhat uneasy relationship between social enterprise and corporate social responsibility (CSR). Agreeing on the objectives of social enterprises is equally problematic in organisational studies research. Haugh (2007) offers a wide definition covering economic, social and environmental goals, arguing that although social enterprises have similar goals to other non-profit organisations, they differ in that they use for-profit business models and strategies to achieve their goals. The overlap between social enterprise and private enterprise is also highlighted by Corner and Ho (2010), who argue that opportunity recognition is a key feature of both forprofit and social enterprises. Some differences between social enterprises and private enterprises, however, are that the former try to create social value by solving social problems, have specific community or social contexts and are characterised by hybrid organisational forms. This would suggest that opportunity development is more complex and organic than in for-profit enterprises and that collective action, based on prior experience, is more typical than individual entrepreneurial activity (Corner and Ho, 2010). The perceived ability to create both social and economic value has led researchers to suggest that all enterprises should adopt a hybrid or blended organisational form (McMullen and Warnick, 2016; Zahra and Wright, 2016). Although social ventures can provide valuable services to communities, particularly in response to cuts to public services, they often have a culture of dependence because they rely on donations, volunteer work and philanthropy to keep going (Haugh, 2007). Moreover, social enterprise need not necessarily have an altruistic foundation; many people are motivated more by personal ambition rather than the social good (Mair and Martí, 2006). Similarly, Dacin et al (2011) suggest that individual motivations are often assumed to be idealistic and altruistic, but that this ignores the impact of social enterprises that fail or have negative outcomes for the target social groups. Equally, although social enterprises are often relied upon to fill gaps in the market or government services, it is rarer for them to be set up as an alternative when the goods or services already exist (Haugh, 2007). As Zahra and Wright (2016) argue, the ‘dark side’ of entrepreneurship can include exploitation of workers and the environment, hyper-competitiveness, corruption and inequality of income distribution. Social enterprises are not immune from this, whether by unintended consequences or by overly focusing on maximising profits at the expense of social value (Dacin et al, 2011). Additionally, government promotion of social enterprise in the UK can limit opportunities to express overt dissent against government policy (Seddon, 2007), meaning that practitioners have to develop more subtle forms of resistance (Dey and Teasdale, 2015). Perhaps this ‘dark side’ of social enterprise is related to the growing popularity of the topic and the general tendency to cast the definition of social enterprise as broadly as possible. Although scholars usually suggest that social enterprises emerge in response to state or market failures, Teasdale (2012) argues that in the UK the term was originally coined as a way of promoting co-operatives

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when Labour were elected in 1997. Noting that the term was used to ‘reposition co-operatives and mutuals as new models for public and private ownership’ (Teasdale, 2012: 108), he charts the evolution of social enterprise from a radical co-operative organisational form to one that incorporated increasingly neoliberal ideas, ending up as a policy tool for successive UK governments which is made palatable to the general public through promotional activities (Dey et al, 2016; Teasdale, 2012). These articles point to a growing unease about the wider social remit of social enterprises, particularly given the ongoing critique of enterprise discourse in the field of organisational studies. The next section critiques social enterprise by positioning it within enterprise discourse.

V.  Enterprise Discourse and a Critique of Social Enterprise A recent ‘Point-Counter Point’ debate in the Journal of Management Studies (2016) highlights the somewhat ambiguous relationship between entrepreneurship and benefits to wider society. Asking whether social entrepreneurship is a norm, the editors posited it in undeniably neoliberal terms: Entrepreneurs take many forms … but their function is to match their goods or services to a market segment and provide that segment with value. As such, by their existence and actions they deliver positive value to society (The Editors, 2016: 608).

But what does value mean? And is being an entrepreneur necessarily a ‘good’ undertaking in and of itself? The editorial suggests that traditionally while it was enough to build a business, treat customers well and offer value to the sector, this definition neglected corporate social responsibility, environmental concerns and possible criminal behaviour. For these reasons, they ask ‘does the social aspect of entrepreneurship need to be part of the business at every turn?’ (The Editors, 2016: 609) In response, Zahra and Wright (2016) question the social role of entrepreneurship, arguing that too much research on enterprise defines success in terms of wealth creation and economic growth. They argue that enterprise should not be evaluated in isolation; its wider social effects must be taken into account. While the view of entrepreneurship is highly individualised, rather than seen as a collective effort, the JMS debate highlights the nuances and complexities associated with social entrepreneurship, suggesting that the relationship between the ‘social’ and ‘entrepreneurship’ is not clear-cut. Others go further, asking whether social enterprise is simply another form of entrepreneurial activity (Dacin et al, 2011). The ubiquity of social enterprise research means that it is assumed to be a moral and rational choice for those who are interested in alternatives to capitalism (Dey and Steyaert, 2012). Social enterprise research should not be above criticism; too much of the current research is based on depoliticised assumptions (Dey and

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Steyaert, 2012) that have gradually become reified and taken as common sense (Fournier and Grey, 2000). Thus there is the danger that social enterprise research ends up focusing on problem solving and functionalist perspectives rather than investigating social enterprise as a radical alternative to neoliberal ­capitalism.4 Problem solving and functionalism reduces social enterprise research to a ‘fascinating playground’ (Mair and Martí, 2006: 42) for scholars, offering opportunities to generate theory, create typologies and investigate processes (Haugh, 2012). Although these are legitimate academic activities, they render the subject of research apolitical (Dey and Steyaert, 2012) and harmless, meaning that researchers become apologists for capitalism (Parker, 2002; Harney, 2009). Recent research has begun to critique social enterprise as part of a wider critical management studies agenda (Dey et al, 2016; Dey and Steyaert, 2012; Dey and Teasdale, 2015; Teasdale, 2012), investigating questions of power, resistance and political motivations. The research casts doubts on the earlier functionalist research into social enterprise which broadly assumed that they contributed to the wider social good. For example, Dey et al (2016) investigate the promotion of social enterprises by intermediary organisations, arguing that they create a hegemonic definition that limits the wider interpretations of alternative organisations and silences accounts which reveal disputes and political conflict. Dey and ­Teasdale (2015) present a case study where third sector workers resist the imposition of social enterprise values in the third sector by ‘playing the game’ as a way of continuing to access resources. Although these represent a relatively small critique of social enterprise, they offer an important corrective to the bulk of the literature which assumes that social enterprise is universally positive. It is also worth positioning social enterprise within the broader critique of enterprise discourse (Gleadle et al, 2008; McCabe, 2009; Nayak and Beckett, 2008; Doolin, 2002), in particular the reimagining of work as a site of self-fulfilment where ‘the enterprising self seeks to master, better and fulfil itself ’ (du Gay, 1996: 65) by being autonomous, self-governing and risk-taking. While much research focuses on the ‘social’ side of social enterprise, it has been argued that ‘enterprise’ is of equal, if not of more, importance (Dacin et al, 2011; Novkovic, 2008; Zahra and Wright, 2016). The enterprising self is characterised as self-interested (Rose, 1999), while enterprise discourse is associated with individualisation at work (McCabe, 2008, 2009) and the gradual erosion of collective action (McCabe, 2007). Such atomisation is unlikely to be conducive to creating social change and it suggests a reason why social enterprise is so often referred to as an individual, rather than collective, endeavour (Montgomery et al, 2012). The next section returns to co-operatives, comparing them with social enterprise in terms of definition, objectives and their wider social remit.

4 

Boeger, ch 10 in this volume.

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VI.  Co-operatives and Social Innovation Having investigated social enterprise and social entrepreneurship at some length, attention now shifts to the definition of co-operatives and their particular principles and values. Unlike social enterprise, the definition of a co-operative outlined by the International Co-operative Alliance is relatively straightforward: ‘A co-operative is an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically-controlled enterprise’.5 The definition prioritises common needs and goals, democratic control and ownership, voluntary and autonomous activity, all framed by a sense of collective endeavour. This allows for diversity as the definition accommodates co-operatives of different sizes and scope, including worker-owned co-operatives, consumer co-operatives and credit unions. While the definition of co-operatives is inclusive and relatively straightforward, the values and principles alert readers to the shared belief in a radically different mode of organising both business and society: ‘Co-operatives are based on the values of self-help, self-responsibility, democracy, equality, equity and solidarity. In the tradition of their founders, co-operative members believe in the ethical values of honesty, openness, social responsibility and caring for others.’6 The co-operative values are explained and expanded upon in seven principles: voluntary and open membership; democratic member control; member economic participation; autonomy and independence; education, training and information; co-operation among co-operatives; and concern for community. The first four principles enshrine the ideals of equality, fairness, democratic control and autonomy. Membership is open to anyone who is ‘willing to accept the responsibilities of membership’7 and the co-operative is democratically controlled by those members. Key to democratic control is the principle of ‘one member, one vote’, meaning that power is not concentrated among the wealthiest, or largest, shareholders, but is distributed equally among members. Surpluses can be reallocated to develop the co-operative, returned to members, set aside as reserves or support other activities. These values point to the possibility of creating a different kind of society. Rather than responding to market or state failure, co-operatives offer the possibility of creating a new social order based on ideals of mutuality, solidarity and equality rather than competitive market-based capitalism. These are principles that are rooted in co-operative history, particularly in the radical traditions of the nineteenth century (Reedy and Learmonth, 2009) as people expressed dissatisfaction with existing structures and ways of organising. For example, the Rochdale

5 http://ica.coop/en/whats-co-op/co-operative-identity-values-principles. 6 ibid. 7 ibid.

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Pioneers set up the first consumer co-operative as an alternative to the contaminated food and dishonest measures found in the company shop (Holyoake, 1922). One of the first worker co-operatives was the HB Fustian Manufacturing Co-op in Hebden Bridge (Bibby, 2015), set up as a productive co-operative in 1870. Beyond the UK, concerns about emigration, usury and unemployment in Ireland in the 1940–50s led to a nationwide campaign to set up credit unions in every town (Mangan, 2009), while in Japan, concerns over food contamination and environmentalism prompted a growth in consumer co-operatives (Kurimoto, 2010). Throughout their history, there are examples of co-operatives breaking up business cartels (Birchall, 2013) and this is one important reason why they should continue to be promoted as a unique organisational form: they offer a collective alternative to market capitalism.8 Co-operative ideals are constantly challenged. Mostly co-operatives are closely tied to their local network which means that they are well placed to serve their members’ interests, but they can often struggle on a wider level (Simmons and Birchall, 2008). Part of the problem for co-operatives is their dual nature; in their purest form they offer an alternative to capitalism, but most worker and consumer co-operatives have to function within the globalised capitalist market (Flecha and Ngai, 2014; Levi and Davis, 2008; Meira, 2014; Sanders and McClellan, 2014). The broad assumption is that they must operate in a ‘business-like’ manner in order to survive and meet their social obligations (Sanders and McClellan, 2014) particularly if they have employees who are not members or who are agnostic about co-operative values (Heras-Saizarbitoria, 2014). Common problems include lack of expertise among board members and hiring non-members (Novkovic, 2008). Operating in a business-like manner can be further complicated by the diffused authority structures in co-operatives (Mangan and Kelly, 2009), while the move towards more entrepreneurial behaviour risks undermining the co-operative ethos, even when the entrepreneurial activity is undertaken for the benefit of the members (Mangan, 2009). Moreover, political interference, even if done with the best of intentions, can stymie co-operative development through the creation of vested interests (Simmons and Birchall, 2008). While much is made of the ‘degeneration thesis’, namely that co-operative business models always tend towards failure, there are examples of long term co-operative success stories, such as the John Lewis Partnership or Eroski, which is part of Mondragon (Storey et al, 2014). Birchall (2013) argues that people often assume that investor-owned businesses are the only forms guaranteed to succeed because they have a simple organisational structure and it is assumed that everyone shares the same goals, namely, maximising shareholder value.9 This assumption is too simplistic, however, as co-operatives often fair better in recessions than investor-owned businesses (Birchall, 2013). Judging the success of co-operatives

8  9 

See also Morgan and Kristensen, ch 14 in this volume. See various contributions in Part I of this volume.

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depends on context, however, as their levels of success vary depending on a country’s level of economic development and political models (Lambru and Petrescu, 2014; Simmons and Birchall, 2008). Indeed, as Simmons and Birchall (2008) note, an individual co-operative’s success can depend on business sector competition, management and members’ needs. Against this view, there is the argument that co-operatives need to be evaluated on their own terms, rather than resorting to standard business models (Rothschild-Whitt, 1979). Advocates of social enterprise have questioned whether co-operatives can create social innovation. For example, Novkovic (2008) suggests that the role of co-operatives is to aid social entrepreneurship, arguing that although they could be a ‘breeding ground’ for social enterprises, their structure creates potential difficulties relating to social capital, intellectual property and other intangible assets. This argument however, assumes that ownership must be individualist and competitive. A contrasting position argues that ‘successful innovation comes less from the individually minded pursuit of competitive advantage and more from a coalition of the willing to create shared value—co-operative advantage’ (Mayo, 2015: 21). This argument derives in part from the final three co-operative principles: education, training and information; co-operation among co-operatives; and concern for community. These principles are less discussed that the first four principles, but they are the bedrock of the wider, radical vision for living a co-operative life. This is because co-operative membership is defined in inclusive terms. Education, training and information is not the preserve of the co-operative membership alone, but is extended to the general public so that they can learn about co-operative models and values. Similarly, principle six encourages co-operation among co-operatives from the local to the international level. Again this principle radically reimagines the economy as a place of co-operation and sharing rather than one of aggression and competition. While this can seem idealistic and impractical from within the dominant neoliberal narrative, co-operation between co-operatives is not a farfetched idea. For example, businesses in the Miyagi prefecture affected by the earthquake-tsunami in March 2011 returned to the traditional Japanese model of kyo-jo (collaborative assistance) with their competitors (Kiyomiya et al, 2013), having concluded that the market economy did not work after the tsunami and that co-operation between competitors was needed in order to rebuild the communities. Such co-operation among co-operatives also crosses international boundaries. For example, Birmingham Bike Foundry, a workers’ co-operative, is supporting both the Kurdish community in Birmingham and the co-operative movement in Rojava, the Kurdish region of Syria,10 and they are encouraging other co-operatives to do likewise.11 This example also illustrates the final co-operative 10 https://cooperationinrojava.wordpress.com/2016/02/19/6-how-our-co-op-is-supporting-thekurdish-communities-in-birmingham/. 11 https://cooperationinrojava.wordpress.com/2016/02/19/7-four-ways-you-can-support-theco-operative-struggle-in-rojava/.

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principle of concern for the wider community. For co-operatives, community is understood broadly and co-operatives have increasingly extended the principle of the ‘sustainable development of their communities’12 to include environmental concerns (Kurimoto, 2010).

VII.  Conclusion: Towards ‘Propagandist and Defensive Action’13 I began this chapter with two vignettes about my experience of ‘selling’ the idea of co-operatives at funding workshops, only to be met with unfamiliarity with the co-operative form or the assumption that co-operatives are social enterprises. Given the popularity of social enterprise at both academic and policy-making level,14 alongside the high levels of recognition among practitioners and the general public, a final question relates to persistence: why should we continue to care about co-operatives? Whether in the form of social enterprises, co-operatives, CICs or B Corps, these alternative organisational forms have emerged in response to perceived failings of traditional for-profit models. Moreover if, as Teasdale (2012) argues, social enterprises were originally conceived of in the UK as a way to promote co-operatives, what harm can there be in continuing to use the two terms interchangeably? To summarise, recent research on social enterprise has begun to move beyond the initial, depoliticised (Dey and Steyaert, 2012) research which sought to establish social enterprise as a field of research. While acknowledging that social enterprises are seen to contribute to the common good, this research questions the focus on individualism rather than collectivity (Montgomery et al, 2010), use of neoliberal business models (Dacin et al, 2011; Corner and Ho, 2010) and reliance on philanthropy to stay in business (Haugh, 2007). There seems to be unease that the popularity of ‘social enterprise’ research is overly focused on ‘good news’ stories and silences accounts of other alternative organisational forms (Dey et al, 2016). While social enterprises have the potential to create social values, as a response to market or state failure, ultimately they work within the status quo (Teasdale, 2012) of neoliberal, market capitalism.15 Co-operatives are not without their problems, given that they are member- or worker-owned organisations operating in a capitalist system (Flecha and Ngai, 2014; Levi and Davis, 2008; Mangan, 2009). Unlike social enterprises however, 12 http://ica.coop/en/whats-co-op/co-operative-identity-values-principles.

13  Part of the dedicatory plaque on the exterior of Holyoake House, Hanover St, Manchester where Co-operatives UK, The Co-operative College, Co-operative News and the Co-operatives Heritage Trust are based. 14  But see Gregory, ch 17 in this volume. 15  But see Boeger, ch 10 in this volume.

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they offer a radical, collective alternative to neoliberal values based on common ownership, mutual self-help and democratic control. Throughout their history, they have enabled workers and consumers to take control of production and consumption, enabling them to ‘choose to meet their needs directly’ (Birchall, 2013: 5) rather than through intermediaries. Although co-operatives have to work within an imperfect system, it is the possibility of co-operative alternatives, based on the principles of education, co-operation among co-operatives and concern for the wider community that offer optimism for radical social innovation where competition is replaced by co-operation. The term ‘social enterprise’ was developed to promote co-operatives in the UK (Teasdale, 2012), however its popularity amongst organisational scholars could mean that the fine-grained differences between it and co-operatives are elided. Thus, this chapter calls for ‘propagandist and defensive’ research on co-operatives to re-engage the wider public with the ideals of co-operative forms of working and to demonstrate how the co-operative advantage (Mayo, 2015) can help to create social action, social justice and social innovation.

References Berry, M (2016) ‘No Alternative to Austerity: How BBC Broadcast News Reported the Deficit Debate’ Media, Culture & Society online first: http://mcs. sagepub.com/content/early/2016/02/08/0163443715620931.abstract. —— (2015) ‘The UK Press and the Deficit Debate’ Sociology online first: http:// soc.sagepub.com/content/early/2015/05/20/0038038515582158.abstract. Bibby, A (2015) All Our Own Work: The Co-operative Pioneers of Hebden Bridge and Their Mill (Pontypool, Merlin Press Limited). Birchall, J (2013) ‘The Potential of Co-operatives During the Current Recession; Theorizing Comparative Advantage’ 2(1) Journal of Entrepreneurial and Organizational Diversity 1–22. Bryan, D, Martin, R, Montgomerie, J and Williams, K (2012) ‘An Important Failure: Knowledge Limits and the Financial Crisis’ 41(3) Economy and Society 299–315. Cheney, G, Santa Cruz, I, Peredo, AM and Nazareno, E (2014) ‘Worker Cooperatives as an Organizational Alternative: Challenges, Achievements and Promise in Business Governance and Ownership’ 21(5) Organization 591–603. Corner, PD and Ho, M (2010) ‘How Opportunities Develop in Social Entrepreneurship’ 34(4) Entrepreneurship Theory and Practice 635–59. Dacin, MT, Dacin, PA and Tracey, P (2011) ‘Social Entrepreneurship: A Critique and Future Directions’ 22(5) Organization Science 1203–13. Dey, P, Schneider, H and Maier, F (2016) ‘Intermediary Organisations and the Hegemonisation of Social Entrepreneurship: Fantasmatic Articulations,

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16 The Internationalisation of the FairShares Model: Where Agency Meets Structure in US and UK Company Law RORY RIDLEY-DUFF*

I. Introduction This chapter is a reflexive analysis of factors that are affecting the internationalisation of the FairShares Model (FSM) in the US and UK. The goal of the chapter, however, is to explore how Giddens’ (1984) structuration theory offers insights into the formation of social enterprises that deploy alternative approaches to incorporation. Between September 2015 and January 2016, three social entrepreneurs used the FSM to constitute two new companies in the UK and US. A study of FSM early adopters provides an opportunity to explore how agents (social entrepreneurs) rewrite structures (Articles of Association) when they form a new social enterprise. By examining how the Articles of Dojo4Life Ltd (UK) and AnyShare Society (US) changed during debates about incorporation, the dialectical relationship between social entrepreneurial agency and institutional structures can be theorised. The rest of this chapter is organised as follows. In the next section, I briefly set out how Giddens’ concept of structuration can inform social entrepreneurship research before establishing the FSM as a product of structuration in the social

*  This book chapter started life as an essay for academics in Japan who wanted to learn about the FairShares Model. The work was further developed for Shaping the Corporate Landscape, a two-day conference at Bristol Law School (June 2016). Special thanks to Dr Nina Boeger and Prof Charlotte Villiers for supporting this work. Finally, this paper would not have been possible without the help of Graham Boyd at Dojo4Life Ltd, and Eric Doriean and Rob Jameson at AnyShare Society.

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solidarity economy (Baudhardt, 2014; Sahakian and Dunand, 2015; RIPESS, 2015). It advances a new, more open, form of co-operativism that challenges ‘old co‑operativism’ over the framing of the common bond (Cruz, 2005; Vieta, 2010; Conaty and Bollier, 2015; Ridley-Duff, 2015a). This is followed by a section on methodology which sets out how I studied changes made by entrepreneurs to FSM model rules to answer the research question ‘what factors are influencing early adopters of the FairShares Model?’ Following a process of naturalistic inquiry, I listed changes made to model FairShares Articles of Association then interviewed company founders about the changes they made. This is presented in two sets of findings: a rich picture of the way social entrepreneurs adapt the FSM to the legal contexts of the UK and US, and; a conceptualisation of the dialectical relationship between social entrepreneurial agents and institutional structures. I conclude that these findings have a wider relevance as they explicate agency-structure dynamics during the formation of innovative social enterprise models.

II.  Structuration and Social Economics Studies of entrepreneurship can benefit from the application of structuration theory (Giddens, 1984). Right-wing think tanks (like the Adam Smith ­Institute) regard markets as naturally existing entities that people ‘cannot buck’ (Hawkins, 2010). They exist outside human consciousness and guide economic activity through their ‘invisible hand’ (Smith, 1790). Giddens’ structuration theory challenges this assumption by arguing that markets are products of human agency created by millions of people who behave ‘as if ’ markets exist. In as much as these activities are produced and reproduced in ways that give rise to stable institutions, the institutions are perceived as immutable social structures that entrepreneurs have to embed themselves within to succeed in business (Giddens, 1990; Jack and Anderson, 2002). However, Giddens’ work is a foundational theory for social entrepreneurship because it frames social structures as products of human activity. In short, markets are produced by agents who give meaning and substance to them. The FSM—as a social project—is rooted in this perspective: social entrepreneurs can reframe (and bypass) markets and market institutions through their agency to establish alternatives. Moreover, this can be studied empirically by investigating how they create rules to enfranchise stakeholders in their enterprises. If, as previously argued, social entrepreneurs self-consciously set out to create new social structures (Martin and Osberg, 2007) then they engage in structuration to proactively craft institutions that assist their socio-economic and/or socioecological goals.

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A.  FairShares as a Contribution to the Social Economy In 2014, I visited Japan to deliver a seminar titled ‘Social Economy: Past, Present and Future’. During this, I introduced a social policy group to the emergence of the FairShares Model (FSM) from a programme of action research to advance ­democratic governance in associations, co-operatives and social businesses (SHU, 2014). In July 2015, FairShares Association Ltd was incorporated to actively disseminate model constitutions and create support systems (see www.fairshares. coop). A core proposition of the FSM is that solidarity between members and interest groups is possible if social entrepreneurs work with providers of labour, service users and social investors through multi-stakeholder co‑operatives (Ridley-Duff, 2015a). The 2015 ‘State of FairShares Survey’ (unpublished) received 43 responses from 14 countries (Australia, Canada, China, Columbia, Croatia, Indonesia, Ireland, Italy, Latvia, Netherlands, Puerto Rica, Spain, UK and USA). Whilst this attests to some limited propagation of the FSM internationally, it is a European Project (‘FairShares Labs for Innovation in Blue and Social Enterprises’) that is proactively spreading it to Hungary, Croatia, Germany, Netherlands and the UK. There is now a persuasive case to develop knowledge of the application of the FSM during internationalisation efforts. This not only informs practice in the social economy but also academic thinking on the role that social entrepreneurship can play in forging an alternative corporate landscape. Figure 1 shows an interpretation of Defourny and Nyssens’ (2015) contribution to an international project to map the logics of social enterprise (ICSEM).1 Scholars draw on a Polanyian understanding of business models that (re)integrate private, mutual and public interests (Laville, 2014). Social enterprise theory is becoming sensitive to both its origins (in state, private and mutual interests) and the legal forms through which it is being expressed as charitable trading activities (CTAs), socially responsible businesses (SRBs), co-operative and mutual enterprises (CMEs) and public service social enterprises (PSSEs). Whilst Figure 1 seeks to clarify the logics, origins and trajectory of social enterprise models, the process by which social entrepreneurs change from one mode of engagement to another is less clear. How and why do social entrepreneurs organise the switch from a state institution, private company or voluntary association to a social enterprise model? How can single-stakeholder enterprises with unitary governance be transformed into multi-stakeholder social enterprises with a plurality of interests?

1 International Comparative Social Enterprise Models, see www.iap-socent.be/icsem-workingpapers.

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Figure 1:  The logics of the social solidarity economy

The FSM represents one of many attempts to stimulate social solidarity enterprises (Ridley-Duff, 2015a, 2015b; Ridley-Duff and Bull, 2016). In singlestakeholder social enterprises, decision-making power is entrusted to an individual philanthropist, social entrepreneur or to a board of directors/trustees that acts as a sovereign power. Solidarity enterprises operate on a different logic, drawing primarily on the democratic traditions of the co-operative movement, but updating the concept to advance the ‘new co-operativism’ described by Vieta (2010): —— Responses by working people and local groups to failures in neo-liberalism; —— Innovations informed (but uninhibited) by pre‑existing co-operative sentiments; —— Wealth distribution mechanisms that achieve sustainable development goals; —— More horizontal labour relations with more egalitarian distributions of surplus; —— A stronger community orientation, embracing social objects and goals. A commonly cited argument against solidarity principles is that conflicts of interest between stakeholders will lead to less efficient resource use and cumbersome governance (Sternberg, 1998; Mason, Kirkbride and Bryde, 2007;

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Griffith, 2009). Nevertheless, the success of co-operative and mutual enterprises (CMEs) that involve both savers and borrowers, both producers and consumers, and both i­ndividual and organisational members, provides a counter narrative (see Whyte and Whyte, 1991; Turnbull, 1995; Gates, 1999; Vinten, 2001; Erdal, 2011; Moreau and Mertens, 2013; Ridley-Duff and Bull, 2016). Arguments regarding the viability of multi-stakeholder enterprises have been strengthened through Nobel Prize winning work (Oström, 1990; Oström et al, 1999) that explicates design principles that producers and consumers can follow to successfully collaborate in democratic assemblies. Oström’s findings suggest that mutual benefits and sustainable development goals can be achieved through crafting rules to guide collective action. Lund (2011) goes even further: solidarity can itself be the basis of a business model. This idea is gaining ground at a time when the internet makes it easier to co-produce, co‑finance and co‑purchase goods through co-operatively managed enterprises and platforms (Murray, 2011; Grenier, 2012; Lehner, 2013; Conaty, 2014; Scholz and Schneider, 2016). Figure 2 shows how the FSM advocates membership for (and co-operative networking between) four primary groups: founders (social entrepreneurs); labour (producers and employees), users (who may be paying customers), and; investors (who create or invest financial capital). The FSM, therefore, is based on the idea that common bonds can form when stakeholders use shared intellectual property to create constitutions that promote equitable voice rights and wealth distribution. Capital contributions are framed as intellectual, human, social and financial investments. Each contribution entitles the contributor to membership, with voice rights and a share of the economic and social returns they create (McCulloch and Ridley-Duff, 2016).

Figure 2:  Member classes / shareholders in a FairShares Enterprise

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The internationalisation of social entrepreneurship is shaped by factors that are now the subject of a major study (Defourny and Nyssens, 2016). Zahra et al (2008) define the opportunities that led to global interest in this field. The prevalence and relevance of opportunities, the urgency of situations, access to resources and radical attitudes are all fuelling ventures that bring about changes in social structures and governance (Martin and Osberg, 2007). However, while Zahra et al’s work examines where international opportunities for social entrepreneurship arise, it tells us less about the influences that act on on social entrepreneurs when they constitute social entrepreneurial responses. Giddens’ (1990) discussion of globalisation is more nuanced through its recognition of the dis-embedding and re-embedding process that occurs in each local iteration of a global idea. Whilst the FSM is a UK-based initiative, it was heavily influenced by works from (and about) Yugoslavia, USA, Australia, Spain and Italy alongside recent developments in UK co‑operatives (Vanek, 1977; Rothschild and Whitt-Allen, 1986; Ellerman, 1990; Whyte and Whyte, 1991; Turnbull, 1995; Restakis, 2010; Murray, 2011). In short, it is already a product of re-embedding ideas in a UK context that were dis-embedded from international development. This chapter looks at the reverse process. It studies what happens when social entrepreneurs dis-embed the FSM from its UK university context and re-embed it in international companies registered in the UK and US (Jack and Anderson, 2002). In studying this, I am mindful that legal frameworks and cultural variation will shape how social entrepreneurs approach re-embedding (Hofstede et al, 1991). Koro-Ljundberg (2004) offers a thoughtful contribution that cross-cultural translation militates against global standards. Instead, local iterations emerge that are shaped by (internal and external) factors that converge at particular times, places and spaces. This process has already been studied in the case of fair trade social enterprises. Huybrecht (2010) found a diverse range of approaches, from single- to multi-stakeholder ownership involving founders, volunteers, employees, partner NGOs, management groups and financial institutions. Fair trade research shows how internationalisation affects norms established by a movement’s pioneers. Certification bodies struggled to implement fair trade doctrines as pressure from multinational corporations increased (Doherty, Davies and Tranchell, 2013). Nevertheless, multi-stakeholder approaches to ownership and governance did develop in some supply chains (Davies, Doherty and Knox, 2009; Mason and Doherty, 2014). In this section, I have summarised arguments relating to the viability of the social solidarity economy. First, I set out how actors seek to reconcile divergent interests by structuring enterprises to promote solidarity between producers and consumers. The FSM is one approach to achieving this through its provisions for enfranchising four primary stakeholders. After identifying some challenges, such as poor efficiency and over-complexity, I noted how numerous studies of multi‑stakeholder enterprises—including those in Oström’s Nobel Prize winning

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research—establish that viability is grounded in the successful crafting of local rules for collaborative action. In the next section, I will argue that Giddens’ concepts of dis-embedding and re‑embedding can inform social constructionist perspectives on social entrepreneurship (Jack and Anderson, 2002). This establishes an epistemology based on the assumption that legal, social and cultural norms are produced and reproduced through the relationships that people create to sustain a community of practice (Wenger, 1999; Johnson et al, 2006). This being the case, my methodology is designed to explore and theorise the (re)construction of the FSM as a community of practice that evolves when socially entrepreneurial agents interact with institutions to shape its future development.

III. Methodology This study had three phases of data collection and analysis. In the first, I systematically compared FSM model rules (dated 1 July 2015) to Articles registered by founders of Dojo4Life Ltd (UK) and AnyShare Society (US) in late 2015 and early 2016.2 I prepared documents that listed all changed clauses and coded them using NVivo to develop a conceptualisation of factors that influenced change. Seven factors emerged in the first phase. In the second phase, the documents were sent to company founders prior to interviewing them. Transcripts and notes were sent to interviewees for them to comment prior to a second round of coding. A further four factors emerged in the second phase. In the final phase, I coded email exchanges and document annotations to develop a reflexive understanding of my own and others’ impact on company founders (see Holland, 1999; Johnson and Duberley, 2003). Descriptions of each factor were developed to establish their distinctiveness. Each factor was allocated to ‘agency’ or ‘structure’ depending on its nature. The 11 influencing factors were: —— —— —— —— —— —— —— ——

Entrepreneurial (83 references in five sources) Cultural (72 references in five sources) Legal (39 references in five sources) Professional (28 references in four sources) Multi-stakeholding (27 references in three sources) Historical (26 references in four sources) Practical (23 references in three sources) Economic (22 references in three sources)

2  AnyShare Society—as a Delaware C-Corporation—registered new Bylaws rather than Articles of Association. For the sake of simplicity, I use the word Articles to refer to their Bylaws.

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—— Philosophical (20 references in three sources) —— Linguistic (15 references in three sources) —— Research-related (14 references in two sources) My participation in the development of the FSM precludes the possibility of neutrality and objectivity. However, it is not an obstacle to naturalistic inquiry (Guba and Lincoln, 1985) in which verstehen (understanding) rather than eklaren (explanation) regarding the application of the FSM to practice is the goal. The systematic identification of variations from model rules did not involve subjectivity: clauses either had or had not been changed. In the third phase, descriptions of the factors were repeatedly updated until they covered all the changes they describe. The result is not an objective account, but a robust, authentic, plausible and confirmable account of the way agency meets structure in social entrepreneurial work (Johnson et al, 2006). I now set out these findings as follows: 1) a description of the variations in the two case companies that helped to identify influencing factors; 2) the allocation of factors against Giddens’ concepts of agency and structure.

A.  A Description of Key Findings Two social enterprises recently registered as companies limited by shares (CLS) after adapting V2.1 Model Rules for a FairShares Company. The first phase of analysis identified how their constitutions were modified prior to incorporation.3

i.  Dojo4Life Ltd Dojo4Life Ltd is a new UK company with the following social objects: Clause 5(c)—to advance the widespread practical adoption of evidence-based neuroscience and developmental psychology research; and of organisational designs and practices which improve systemically the capacity of organisations to create environmental, human, social and financial capital; to promote the development of financially, socially and environmentally responsible entrepreneurship. Articles dated 1/12/2015.

Four findings stood out: 1) changes to voting and dividend rights; 2) the use of ‘entrenched provisions’4 to empower Founders; 3) a governance system based on holacracy and requisite organisation design, and; 4) Labour member powers relative to Users and Investors. First, the four member classes were retained (Founders, Labour, Users and Investors) with changed voting and dividend rights.

3 

See www.fairshares.coop/wiki, page = FairShares Articles of Association for further details. Entrenched provisions are a feature of the UK Companies Act 2006 that permits the specification of additional criteria when seeking to change specific clauses by special resolution. 4 

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Ap ­ reference for weighted voting ensures that Founders have 60 per cent of voting power at start-up, but only one per cent of dividend rights. Founders voting power falls to 26 per cent as other forms of membership increase. Given the changed distributions of voting power, Users and Investors cannot block ordinary resolutions proposed jointly by Founders and Labour members, but have sufficient power to oppose special resolutions. Entrenched clauses prevent changes to rules about share types, voting rights and wage ratios. To change entrenched provisions, unanimous support of the company’s Founder members is required. In effect, this protects the veto rights of Founders over the dilution of FairShares principles whilst also preventing a simple majority of Founders from changing articles that take away powers from other member classes. As one founder commented: The role of the Founders is to guard the company’s purpose … So initially, they ought to have a very strong stewardship role in protecting the integrity of the purpose, and guarding that against the risk of it being watered down in the articles unintentionally or deliberately … But, as the company matures, and more and more Users and Labour members and Investor members are involved … their decision weighting will rise and … the Founders will decrease.5

Interestingly, entrenched provisions protect clauses that define capital and ­voting powers, one-member one-vote principles, governance and eligibility for directorships. For example, entrenched provisions include formal commitments to holacracy (Robertson, 2007, 2015), requisite organisation design (Jaques, 1998; Laske, 2009) and a cognitive development framework created by Graham Boyd (a founder). Holacracy is a philosophy that advocates switching from hierarchy to holarcy: self-organising teams with overlapping management responsibilities. This fits with principles for requisite organisation design (Jaques, 1998) by focussing on changes to systems, not people, when concerns arise about human behaviour. These commitments arose out of research undertaken by Graham Boyd, a founder, who made his career as a corporate turnaround specialist. Boyd cited Jacques (1998) during his interview as his source for thinking that organisation structures trigger psychopathic and pathological behaviour. From this perspective, entrepreneurial agency is directed towards producing systems and organisational structures that forge responsible behaviour by company members. Management concerns are directed towards system designs, not personality traits, to collectively develop viable management systems. As a result, leaders are selected for their capacity to resolve long-term social dilemmas and organisational issues, not the achievement of short-term performance targets. Boyd’s cognitive development framework drew heavily on works by Kegan (1982) and Laske (2006, 2009) to frame the concept of ‘dialectical fluidity’. Directorships were reserved for those with elevated levels of dialectical fluidity as these were perceived as the cognitive abilities and emotional responses needed for governing a holacracy. 5 

Interview, 23 May 2016.

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The last entrenched provision increased Labour (rather than User) representation to reinforce Labour members’ role in decision-making. Clause 10 (c) requires three Labour members to be present (rising to 10 as membership increases) before decisions can be made. Boyd gave two reasons: first, many Users will become Labour members; and second, Labour members are likely to be more committed than User members. Where you draw the line between User and Labour is to some extent arbitrary [and] we will be drawing the line […] at a point that is quite generous […] People who truly engage and commit are more likely to have Labour shares than User shares.6

ii.  AnyShare Society US-based AnyShare Society have committed to the following social object: Clause 5(g)—to develop technologies that eliminate scarcity by unlocking the hidden abundance of resources available amongst our members through systems for buying, selling, trading, gifting, renting, borrowing and collaborating with their friends, community and fellow members.7

Five key findings stood out: 1) voting and dividend rights for Founders; 2) linguistic changes to accommodate US law and culture; 3) company valuation processes; 4) processes for terminating employment and/or membership; and; 5) handling conflicts over intellectual property. Similar to Dojo4Life Ltd, care is taken to empower the Founders to fulfil their wish to be ‘activist philanthropists’. Whilst AnyShare’s bylaws gave only 10 per cent of weighted voting rights (and dividends) to Founders, they retained a requirement for a majority in every stakeholder group to pass special resolutions. Founders, therefore, have veto powers like those created by Dojo4Life’s entrenched clauses. Linguistic changes accommodated the changed legal and cultural context. References to non-profit and co-operative legal forms were reframed. References were added to L3C Companies, Foundations, Non-Profit Corporations and B‑Corps instead of Charities, Community Interest Companies and Cooperative Societies. Furthermore, specific legislation in the US relating to Employee Benefit Trust (EBTs) and Employee Share Ownership Plans (ESOPs) were directly referenced to add clarity. As the interview notes attest: Rob commented that is it more typical to talk of an Employee Cooperative than a Worker Cooperative in the US. People might also talk of a Labour Cooperative. We confirmed that L3C and B-Corp changes were appropriately coded as ‘cultural’ influences.8

6 ibid. 7  8 

Bylaws, registered 13 January 2016. Interview notes, 1 June 2016.

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Legal changes were also needed. One question that vexed founders Eric Doriean and Rob Jameson was the impact of US ‘blue sky’ laws for accredited investors. Initially, this looked like it would frustrate FairShares principles by making some shareholdings illegal: That [blue sky] law on accredited investors looks incredibly restricting. My blood ran cold when I read how restrictive it is, as if it is imposing a ‘cost of entry’ so that only wealthy people can invest.9

However, a response from Rob Jameson (9 October 2015) showed they were exploring the effects of Obama’s Jobs Act. On 17 November 2015, the founders reported that this not only provided a solution for issuing Labour shares but also covered how to sell Investor Shares to a community of non-accredited investors (under the Jobs Act, Title III). Further changes were made to reflect the culture of the IT industry. The FSM approach to valuation is based on a combination of practices from Spanish Mondragon Co-operatives (Whyte and Whyte, 1991) and a UK Employee-Owned Business called Gripple. Gripple pays 30 per cent of profits each year to employees and calculates company value as 30 x [last dividend paid to employees]. At Mondragon, members have ‘capital accounts’ that can be revalued after revaluing fixed assets. The default FSM company valuation clause (the ‘Reference Value’) reads ‘the book value of fixed assets plus 20 (twenty) times the Investor Share for the previous accounting period’ (Clause 13). Following a meeting with a professional adviser, Eric Doriean raised how the ‘Reference Value’ of their company should be calculated. As the Reference Value feeds into a figure for ‘capital gains’ that determines the issues of Investor shares to Labour and User members, the calculation mechanism was seen as important: We’d like to change it to assets + reserves + 20x valuation. Assets would then include all assets as per Generally Accepted Accounting Practices. Add ‘reserves’ just to be clear they [are] included, as they could potentially get large.10

An accountant at the FairShares Association confirmed that they could consider: the IT tools … as separable internally generated intangible assets under IAS38, International Financial Reporting Standards (which are replacing GAAP). That would give two possible methods of valuation [including] fair value based on future cash flows.11

As an ICT company, value calculations were influenced by the cultural norms in international reporting standards of a specific industry. Value depends less on fixed assets and more on the volume of subscription income generated through a software platform. The word ‘fixed’ was removed and ‘reserves’ was added to frame value as the sum of liquid and intangible assets.

9 

Email from author to Eric Doriean and Rob Jameson, 9 October 2015. Email from Eric Doriean to author and Rob Jameson, 26 November 2015. 11  Email, 10 December 2015. 10 

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Further challenges arose from the company’s history. AnyShare’s technology was created while the Founders ran Massmosaic where they benefitted from a service offered by StartFast: They had offered a 7% shareholding in exchange for $25k of mentoring services [and] participated in a venture accelerator programme in New York. They want to retain options to attract impact investors but [are] ruling out negotiating finance with venture capital organisations.12

Previous experience in the IT industry also shaped changes to dispute resolution clauses. Jameson described his feelings about past disputes and Doriean recalled how a ‘toxic culture’ could develop if disruptive people could not be removed. Their previous experiences led to changes in the process for resolving disputes. Lastly, AnyShare’s founders wanted to give support to Creative Commons as part of their commitment to a sharing economy. However, practical industry considerations led to discussions about reworking an intellectual property clause. They confronted a paradox that some of their software products needed to be protected through laws designed to advance private property if they were to secure their goal of releasing stable Open Source Software (OSS). Clauses permitting AnyShare to trademark and patent their software products were added alongside other clauses regarding staff rights to IP on the operations of the enterprise. However, as the study makes clear, professional advice influenced this: [They had a] concern about the viability of the code if it is ‘too open’. Both Eric and Rob mentioned that the balance of practice is still to be determined. Whilst not a fan of patents, their mentor reinforced that life experience shows that the best way to deal with threats to a company is to protect its IP.13

Before fleshing out a conceptualisation of agency-structure dynamics (Giddens, 1984; Jack and Anderson, 2002) it helps to show a list of changes to FSM model rules that were triggered by different influences (see Table 1). Table 1:  Variations of FSM rules by Dojo4Life Ltd and AnyShare Society Dojo4Life changes

AnyShare Society changes

Influence

Section: Definitions Weighted majority voting for special resolutions (75%) Use of ‘entrenched provisions’ (Social) Objects

A preference for Employee Shareholders over Labour Shareholders (throughout) Identification of US corporate forms for social entrepreneurship (Social) Objects

Cultural Linguistic Legal Entrepreneurial

(continued) 12 

Interview notes, 1 June 2016.

13 ibid.

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Table 1:  (Continued) Dojo4Life changes

AnyShare Society changes

Influence

Section: Membership, Capital and FairShares Branding Entrenched provisions for share types / share characteristics and new share issues Support for listing unquoted shares on a crowd investing platform Voting rights for Founders, Labour, Users and Investors that change over time Separation of voting and dividend rights

Qualifying contributions listed on website Transfer rights to trusts and employee share plans, non-, low- and B-Corps Support for the use of crowd funding / investing platforms Separation of ‘assets’ and ‘reserves’ in company valuation

Cultural Economic Entrepreneurial Historical Multi-stakeholding Professional

Change ‘President’ to ‘Chair Person’ Requirement that 10% of a member class needs to support a resolution before going forward to a General Meeting Including Founders in weighted voting 500-member threshold before elected directors are triggered

Multi-stakeholding Linguistic Philosophy Practicality Research

Section: Governance Labour representation before a Quorum Including Founders in weighted voting Entrenched provisions for holacracy, requisite organisation design and use of a cognitive developmental framework Qualifying criteria for Directors (Dialectic Fluidity/ Kegan Stage/Otto Laske)

Section: Expenses, Benefit and Pay 15:1 ratio between highest and lowest paid Separate Founder and Labour approval for changes to the maximum pay ratio Minimal Founders’ dividends Dividend allocations: Founders (.01), Labour (.40), Users (.24) and Investors (.35)

10:1 ratio highest to lowest paid $100,000 threshold on capital / research costs before investor share issue required Inclusion of Founders in dividends Dividend allocations: Founders (.1), Labour (.25), Users (.25), Investors (.4)

Economic Entrepreneurial Historical Practical

(continued)

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Table 1:  (Continued) Dojo4Life changes

AnyShare Society changes

Influence

Section: Accounting and Auditing 100 FTE Labour member threshold before social auditing becomes a requirement

5,000-member threshold before social auditing becomes a requirement

Multi-stakeholding Practical

Section: Dispute Resolution and Intellectual Property Use of a Governance Tension resolution process Use of binding arbitration at ACAS if disputes cannot be resolved internally

Governing body rights to terminate membership after investigation / appeal Modified intellectual property rights + six month restriction for departing members

Historical Linguistic Philosophical Practical

$15,000 residual asset threshold before paying a community dividend

Entrepreneurial

Section: Dissolution N/A

Table 1 shows 11 factors that triggered changes to FSM model rules. Prior to the interviews, almost half the changes were thought to be rooted in entrepreneurial desires and knowledge, followed by cultural norms, legal requirements, professional advice and historical context. This initially gave an impression that entrepreneurial agency is a particularly powerful driver for change, and that historical precedent is weak. After conducting interviews, tracking email trails and document annotations, a changed picture emerged. Whilst entrepreneurial desires were still the most common rationale for changing Articles, a wider array of other influences (organisational and management philosophy, economic outcomes, linguistic clarity, personal research and commitments to multi-stakeholding) were identified. This reduced the dominance of entrepreneurial desires to 83 of 347 references (24 per cent). In the next section, the factors identified are grouped into those that reflect institutionalised structures and entrepreneurial / professional agency.

IV.  Conceptualising the Influence of Social Entrepreneurial Agency on Structures In this section, I describe ‘agency’ by founders and their advisers to clarify the meanings attributed to each conceptual category. Giddens set out the relationship

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between structure and agency by arguing that they are mutually interdependent (Giddens, 1984). In structuration theory, agency is not separate from structure because each recursively shape the other. Social structures—whilst enduring—are products of human agency and ‘free will’ remains subject to social agreements that constrain practice. The Articles of new social enterprises represent evidence of the dialectical relationship between agency and structure. I start with philosophy (see Figure 3). As Boyd explains, he sought to embed a commitment to requisite organisation design: So what we built into the Articles here is that for Dojo4Life to truly walk the talk of its purpose of creating deliberately developmental organisations with highly developed individuals as the output, we need to ensure that we are structured as a requisite organisation.14

This philosophy was informed by research into Kegan (1982), Jacques (1998) and Laske (2006, 2009) as well as his own PhD study into particle physics. The latter taught him that the behaviour of particles depends on the nature of their interactions with other particles as well as the external pressures exerted on them.

Figure 3:  Agency influences on Articles of Association

For Boyd, human agents respond to various pressures (particularly complexity) in a variety of ways that, in turn, depend on the way they interact with other human

14 

Founder interview, 26 July 2016.

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agents. These personal philosophies and research informed choices s­urface as social entrepreneurial values and/or professional judgements during company formation. A further example shows not only how philosophy influences choices but also how practical adequacy acts as a moderator. AnyShare’s social object ‘to eliminate scarcity by unlocking the hidden abundance of resources available amongst our members’ was informed by a view that ‘all exchange dynamics should be possible’ because if they are not, the unconscious bias of the system designer skews practice. Jameson and Doriean insisted their users should determine exchange dynamics rather than having one imposed on them. This shows a preference for pragmatism (James, 1907), with practical adequacy moderating entrepreneurial choices and professional advice. The issue of practical adequacy came up often enough to be a distinctive finding, but was not dominant. But when it did surface, it exposes key ethical choices. For example, AnyShare founders felt caught between a wish to support Creative Commons and Open Software Systems (OSS) and market pressures to privatise (and protect) core programming code. As a result, they received this advice: A pragmatic solution would be to differentiate core IP and peripheral IP. How about rewriting clause 53 … to distinguish how [code] is treated from everything [that] supports [company] operations … ‘As a condition of membership and/or employment, all programming used to build the domain [www.anyshare.coop] shall be owned by the Company until such time as it is released as part of an Open Source product.15

V.  Conceptualising the Influence of Social Structures on Human Agency Jack and Anderson (2002) use Giddens’ structuration theory to explain how entrepreneurial success is influenced by embeddedness in communities. They found that entrepreneurs who embed themselves in a community are more able to form durable enterprises. The talent of agents—it seems—is not sufficient. It also depends on how institutions (and institutional processes) accommodate and react to their entrepreneurial agency. In short, not all acts are possible in all contexts. Figure 4 summarises how industrial, legal and institutional norms prompted further changes to FSM model rules.

15 

Email from author to Eric Doriean and Rob Jameson, 27 September 2015.

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Figure 4:  Structural influences on Articles of Association

Overall, AnyShare had more challenges addressing institutional issues because of the US legal and cultural context. However, I choose to start with history. At AnyShare, Founders wrestled with honouring pre-existing agreements: I checked the ‘Stock Purchase Agreement—Start Fast’ … I know they have an antidilution clause whereby they get new common stock shares issued if we get investments under $250k. … [We] will need to look into [this] more closely, and will undoubtedly require at least further elaboration in our existing agreements.16

Finding solutions was more challenging because of linguistic differences. For example, correspondence between 17–23 November 2015 focuses on whether ‘shares’ (UK) are ‘stock’ (US), and whether specific types of share were ‘common stock’. Clarifying this was necessary before a response to the ‘anti-dilution’ question could be agreed. For example: You are right that Founder, Labour and User shares are not common stock. They provide for dividend and voting rights while they are held, but they do not give rights to a share of company assets (only Investor Shares/Common Stock do this). This might keep you the

16 

Document annotation, 4 October 2015.

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right side of the anti-dilution clause at the moment, but it could cause a problem when you issue new Investor Shares (common stock) to Employee and User shareholders.17

Other changes were made to accommodate economic conditions, or to achieve specific economic outcomes. In this example, Dojo4Life discuss adapting shareholder dividends to their economic context: There may well not be an appreciable capital gain so the idea is that [we] reward people in terms of participation in events … In a way, part of what we’re trying to do here is embed at the shareholder dividend reward level what’s already common practice in the Open Source Software movement.18

The reference to the OSS movement indicates another type of social structure— the sharing economy. In both companies, numerous changes—second in number only to those that were entrepreneurially driven—align firms culturally with local, regional, national—and in some cases, social economy—norms. These changes were not legal requirements but helped them to achieve a viable fit with specific business environments. For example, AnyShare queried how they could reproduce ‘vesting’ within the FSM: It’s common practice with IT companies to vest stock (ie give an allocation of stock and then vest that stock after milestones like time served are reached). Do you see this as being something we could integrate into the Bylaws? If not, how does increasing allocations of Investor Shares for employees play out over time?19

Just as ‘practical adequacy’ was a moderating influence on changes initiated by entrepreneurial or professional agency, so ‘multi-stakeholding’ emerged as the moderator of social structure changes. Dojo4Life gave an example that illustrates how founders conceptualised changes to members’ stakeholder relationships over time: [W]e intend this company will go global, so we’re expecting to have User shares spread […] around the world. …. For example, … a user who has started-up their own practice Dojo in their village … there may be a transition from being a User to Labour. This is all about trying to prepare the ground for people who are actively engaged [and who] will have their User shares converted to Labour Shares at some point.20

Having presented conceptualisations of factors and their agency-structure dynamics, I can now return to the research question. My closing section clarifies the significance of the study and its implications for conceptualising social entrepreneurship.

17 

Adviser email, 21 November 2015. Interview with Graham Boyd, founder of Dojo4Life, 23 May 2016. 19  Founder email, 24 September 2015. 20  Interview with Graham Boyd, founder of Dojo4Life, 23 May 2016. 18 

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VI.  Conclusions and Implications We started with the research question ‘what factors are influencing early adopters of the FairShares Model?’ The practical value of answering this is identifying how early adopters approach the creation of ‘alternative’ corporate forms. This is particularly valuable to practitioners who are concerned with the practical adequacy of the FSM in new contexts (James, 1907). This study finds a complex array of factors that influence and moderate the process. At the heart is a search for practical approaches to multi-stakeholding. In both cases, social entrepreneurs and support professionals found ways to navigate the challenge of adapting the FSM to the logics of industries, local and national laws. Entrepreneurial (and professional) agents refined their language, adjusting it to meet cultural and legal contexts, whilst also innovating their usage of law (eg the Jobs Act) to re-establish the FSM’s credibility as a contribution to the social economy. These dynamics are summarised in Figure 5.

Figure 5:  Agency-structure dynamics constituting a multi-stakeholder social enterprise

Articles (Bylaws) are artefacts through which the dialectical relationship between agency and structure is concretely expressed. The academic value of studying them goes well beyond simple descriptions of how the FSM can be applied to

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social enterprise creation and new co‑operativism (Vieta, 2010; Lund, 2011, 2012). First, it provides rich descriptions from which to theorise how social entrepreneurs dis-embed and re‑embed their ideas to change social structures (Jack and Anderson, 2002). In doing so, a new empirically-informed conceptual framework was developed to sensitise practitioners practising social entrepreneurship in new territories. Second, Giddens’ structuration theory proved a valuable lens for understanding Articles as living artefacts. Given that the value propositions of social entrepreneurs are based on their belief that they can challenge social structures and norms (Martin and Osberg, 2007), studying the Articles they produce offers a new way to learn about their agency. In this study, social entrepreneurs and professionals combined their efforts to refine the FSM so it could be used within two new communities of practice—a developmental coaching network (Dojo4Life) and a platform cooperative (AnyShare). Third, the study made it possible to etch a rich picture of social entrepreneurial efforts to challenge ‘unitary’ approaches to governance. In this regard, the finding that social entrepreneurs are interested in pursuing multi-stakeholding through holacracy is worthy of further study. Furthermore, a finding that new approaches to management can be based on ‘dialectical fluidity’ (cognitive and emotional development) extends findings published by Moreau and Mertens (2013) on the qualities needed by social enterprise managers. Last, this study sets out a viable methodology for studying the relationship between social entrepreneurial agency and social structure. The methodology developed here can be repeated when the FSM is adopted in Hungary, Croatia, Germany, Netherlands and the UK to produce further findings on the role of social entrepreneurship in shaping a new corporate landscape.

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Creative Commons Copyright, 2016, Rory ­Ridley-Duff International SA-NC-BY Licence. You are free to copy, adapt, distribute and re-use this material under the terms of the author’s Creative Commons Licence. Commercial reproduction rights have been granted to Hart Publishing.

17 The Politics, Policy, Popular Perception and Practice of Social Enterprise in the Twenty-first Century DAN GREGORY

I.  What is Social Enterprise? Social enterprise is a somewhat vague and contested term, with no formal, legal basis, at least in the UK. As Teasdale (2010) describes beyond the notion of trading for a social purpose, there is little consensus as to what a social enterprise is or does. Existing academic literature provides a bewildering array of definitions and explanations for their emergence. This is because the label social enterprise means different things to different people across different contexts and at different points in time. This conceptual confusion is mirrored among practitioners (Teasdale, 2010: 2).

Nevertheless, for more than a decade now, there has been at least some degree of consensus in political and policy circles as to the definition of social enterprise, with various UK government departments, social enterprise membership networks and European institutions adopting very similar, although subtly different definitions. Teasdale describes how the ‘early work of the social enterprise unit within the DTI [Department for Trade and Industry] focused upon creating a definition.’ This work led to the development of the most commonly used definition we see today in the UK, that ‘A social enterprise is a business with primarily social objectives, whose surpluses are principally reinvested for that purpose in the business or in the community, rather than being driven by the need to maximise profit for shareholders and owners’ (DTI, 2002). This has brought some consistency to the terminology, while disagreements, perhaps inevitably, persist (DTI, 2002). Today, social enterprises have come to be defined, more or less, as businesses which: —— are independent of government; —— earn most of their income through trading;

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—— enshrine a social (or environmental) purpose; and —— principally reinvest their profits in that mission. So on this basis, government statistics now identify around 70,000 social enterprises in the UK, contributing £24 billion to the economy and employing nearly a million people (Social Enterprise UK, 2017). This is a diverse sector, which includes trading charities, co-operatives and community businesses; startups, local enterprises, national and international businesses; longstanding, trusted civic institutions with roots in the Victorian era and dynamic, innovative twentyfirst century tech ventures. Social enterprises which may be familiar to those who don’t work in the field include: —— Divine Chocolate—the Fairtrade chocolate company partly owned by cocoa farmers; —— Belu Water—100 per cent carbon neutral bottled water company which gives all of its profits to its charity partner, WaterAid; —— Café Direct—the leading Fairtrade hot drinks brand in the UK; —— Assemble CIC—who won the 2016 Turner Prize for their work on affordable housing in Liverpool; —— Welsh Water/Glas Cymru—a single purpose company with no shareholders run solely for the benefit of customers. There are tens of thousands more across the UK, running hospices, GP services, social care, community-owned pubs, post offices and village shops, art centres, cafés, cinemas, renewable energy production, children’s centres, leisure centres, wood, IT and bike recycling businesses, and more.

II. Politics Before 1997, ‘social enterprise’ as an idea appeared relatively infrequently in political discourse. But after the election of Tony Blair’s New Labour Government, and after a few years of Ministers adapting to their new-found positions of power after decades in opposition, the concept of social enterprise within political circles began to emerge more noticeably at the start of the new millennium. Some of the association between social enterprise and the Blair government has, however, been implicit rather than explicit, based on its apparent natural resonance with the concept of the Third Way (Haugh and Kitson, 2007). Much like the Third Way, the term social enterprise itself suggests a kind of triangulation between business and society, between economic and social imperatives, between markets and public benefit. There is therefore a tendency to assume that the arrival of social enterprise was an idea purposely championed by the leading lights of New Labour. Yet in reality, Blair himself was rarely directly engaged with social enterprise policies, if at all, and actually said very little publicly about social enterprise beyond

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occasional forewords to social enterprise publications, obviously penned by civil servants, such as the DTI’s 2002 ‘Social Enterprise: A Strategy for Success’ (DTI, 2002) or in speeches written by special advisers. There is little evidence that he was personally captivated or enthused with the idea. Similarly, there is little evidence that Gordon Brown thought deeply about the idea of social enterprise. In this former Treasury civil servant’s experience, working under Gordon Brown, his interest in the voluntary, community and social enterprise (VCSE) sector appeared to be primarily focused on volunteering, social action, young people and the potential for fan ownership of Raith Rovers. Meanwhile, and too often forgotten, another Labour Minister was much more closely engaged with pushing the idea of social enterprise, translating the idea into a more practical Government programme of action. Patricia Hewitt, first at the DTI (now the Department for Department for Business, Energy & Industrial Strategy (BEIS)) and then at the Department of Health. At the DTI, Hewitt established the first ever Social Enterprise Unit in 2001 (DTI, 2002) and at the Department of Health, she again created a specialist social enterprise unit, resourced with staff budget and ministerial backing. Around the same time, the then Chief Secretary to the Treasury, Paul Boateng, had also developed a similarly deep founded commitment to supporting the role of the voluntary and community sector (HM Treasury, 2002)—and by extension social enterprise—in public service delivery and reform. Perhaps the resonance between the Third Way and social enterprise enabled Hewitt, Boateng and other junior Ministers space and power to drive forward their ideas, even without explicit or active Prime Ministerial backing. In any case, by 2006, the rise of social enterprise in the political sphere had led to the appointment of Ed Miliband as the first Minister for the Third S­ ector with a new unit established in the Cabinet Office. The Office of the Third Sector (OTS) effectively tidied up various departmental groups working on related areas and brought together officials from the Treasury, Home Office and the Social Enterprise Unit in the DTI under one roof. In the same year, the OTS published their ‘Social Enterprise Action Plan: Scaling New Heights’ (Cabinet Office, 2006) with introductions by Blair, Brown and Miliband. This heady period for social enterprise in political terms perhaps peaked when Cabinet members Hazel Blears, James Purnell, Peter Mandelson and Liam Byrne jointly held a social enterprise summit at Coin Street Community Builders on the south bank of the Thames in May 2009 (Cabinet Office, 2009). So, by the end of New Labour’s turn in office, social enterprise had become recognised as a movement with significant political backing, through apparent commitment from the highest level, more practically focused Ministers committed to the cause, and a natural fit with the overarching Third Way narrative or ideology. This was not without tensions or problems of course. On one hand, some from within the social enterprise movement have pointed out that the Government’s agenda was perhaps dominated by the role of social enterprise in public services and welfare reform rather than an interest in reforming private markets

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or d ­ emocratising ownership, for instance. Alibeth Somers describes this as New Labour framing social enterprise in its own terms, and in doing so potentially establishing a new form of state sponsored social enterprise (Somers, 2013: 19). Others from within the voluntary sector were also frustrated by New Labour’s emphasis on social enterprise, seeing it as a means to impose structural reform on Britain’s third, or independent sector. By initiating a wide-ranging social enterprise agenda that prioritized trading activities over what were previously cast as charitable ones, the result was that New Labour significantly altered the future trajectory of the size and shape of Britain’s third sector (Somers, 2013: 19).

Yet by the time of the 2010 election, social enterprise’s moment in the sun was already coming to an end. Tessa Jowell had started to push a ‘mutuals’ agenda in the last days of the Labour government (Jowell, 2009) and social enterprise failed to feature prominently in any of the major party’s political manifestos. Despite the Big Society rhetoric, which some perceived to imply support for social enterprise, rather like the Third Way, the new Conservative Prime Minister David Cameron actually said very little about social enterprise. Chris Grayling at the Ministry for Justice and Andrew Lansley at the Department of Health sometimes mentioned social enterprise but only in the context of opening up public service markets towards a mixed economy of charities, social enterprises and independent or private providers (Ministry of Justice, 2014). Social enterprise was starting to be seen by some as a conservative smokescreen, Trojan horse or backdoor to privatisation. In private, Chris Grayling was heard to express little faith in the power of notfor-profit service providers. Cabinet Office Minister Francis Maude was pushing his spin-out agenda with a mutuals rather than social enterprise banner and even the Minister for Civil Society Nick Hurd, with formal responsibility for social enterprise (in the rebranded Office for Civil Society) was more interested in social investment than social enterprise. This remained the situation until the 2015 General Election, by which time the Labour party had also forgotten their enthusiasm for social enterprise. Then leader Ed Miliband, despite developing a critique of capitalism as usual and with the background of his first ministerial post, never once seriously suggested that social enterprise might be part of the solution. A succession of Shadow Ministers for Civil Society and Chi Onwurah MP who held formal responsibility for social enterprise barely mentioned the term. Only with the election of Jeremy Corbyn as party leader have we seen any suggestion that Labour are rediscovering their longstanding support for the idea of social enterprise or a social economy. Corbyn has explicitly called for a mixed economy of public and social enterprise while shadow Chancellor John McDonnell has also championed the idea. Yet the current Labour leadership are seen by many as political outliers, widely accused of being unrealistic idealists and unelectable. Twenty years after social enterprise started its journey to developing serious political currency, the movement finds itself again consigned to the political margins. Economic alternatives are once again seen as alternative.

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III. Policy Since the turn of the century, dozens of discrete policy initiatives targeted at social enterprise have emerged from various central government departments, diverse in size, shape and form. The Foundation for Social Entrepreneurs—UnLtd—was created in 2000. But the first major government policy programme explicitly targeted at social enterprise arrived in 2002 with the DTI’s Social Enterprise Action Plan, ‘A Strategy for Success’ (DTI, 2002). This included a range of policies seeking to improve b ­ usiness support to social enterprises, to support access to finance, to establish baseline data on the sector and to raise awareness of social enterprise more widely. The plan also set in train the process that ultimately led to the creation of the new Community Interest Company form in 2005 (Community Interest Company Regulations 2005), designed specifically for social enterprise. Subsequently, also under Patricia Hewitt’s direction, the Department of Health established a discrete Social Enterprise Unit and set aside tens of millions of pounds towards a Social Enterprise Investment Fund (Royal College of Nursing, 2007). The Department for Communities and Local Government in its various incarnations also introduced policies and funds to promote social enterprise, if not by name, but in the form of support for development trusts, community shares, community land trusts and more. In 2006, as the Cabinet Office took on formal responsibility for social enterprise policy, Gordon Brown and Ed Miliband launched the second Social Enterprise Action Plan: ‘Scaling New Heights’ (Cabinet Office, 2006). The plan included commitments to a programme of social enterprise Ambassadors, pushing social enterprise into school curricula, better business support, a £10 million pound risk capital fund, financial support for strategic partners, financial awareness training, and measures intended to support social enterprises in government procurement and the 2012 Olympic Games. The Cabinet Office was also working on the development of what has now become Big Society Capital which, while it now exists to grow the social investment market, was originally intended to support access to finance for social enterprise. In retrospect, the creation of the Office for Civil Society was a pivotal moment, and perhaps in a more negative sense than it was understood to be at the time. The period from 2006 to 2010 was arguably the beginning of the end of the golden age of social enterprise policy development (no judgement is made here on the success or effectiveness of theses social enterprise policies, merely their prevalence and significance), as a result of three combining factors. First the decoupling of crucial policy levers from social enterprise policy-makers. Second, the perhaps inevitable collapse of a loose consensus around social enterprise as a sort of unifying umbrella in policy terms, and third, as a result of the emergence of devolution and localism agendas.

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First, it seems that the placing of responsibility for social enterprise policy within OTS distanced policy-makers from some of the policy levers they had previously had more easily to hand. This was arguably, therefore, counterproductive to effective policy-making over the medium-term. By some analyses, policy-makers have four types of policy levers at their disposal. These are the hard levers of regulation, taxation and spending together with the softer lever of awareness raising, championing or nudging. The Treasury, where some OTS staff once sat, holds a firm grip over fiscal levers. The Department for Business, where the Social Enterprise Unit was hosted, steers many billions of pounds of government spending towards enterprise of all kinds, through various growth funds, venture capital funds, the British Business Bank, finance guarantees and many more initiatives. The Home Office is traditionally a department which features prominently in the Queen’s Speech, having experience and confidence in its role in introducing new laws and passing Bills through Parliament. Yet the Cabinet Office has none of these. So in retrospect, the creation of the OTS and the positioning of social enterprise policy responsibility within it, was a high stakes bet on the power of nudge and the ability of Cabinet Office Ministers and officials to influence levers held by other departments. Occasionally, this bet paid off in some small way, for instance with the creation of the new Social Investment Tax Relief by the Treasury or in rhetoric by Chris Grayling at the Ministry of Justice about the role of civil society in transforming rehabilitation. But influence over the billions of pounds of BEIS spending has been almost non-existent and OTS’s spending power itself is limited to a relatively small and shrinking Treasury spending settlement beyond its control. No legislation has been passed with specific relation to social enterprise since the creation of the Community Interest Company (see Boeger et al, chapter 18, herein) aside from one minor piece of legislation regarding HealthWatch which emerged from the Department of Health (Healthwatch, 2014)—independently of the Cabinet Office. (The UK Public Services (Social Value) Act 2012, seen as the piece of legislation most relevant to social enterprises in England is, in fact, not about social enterprise at all and was originated by one independent minded Parliamentarian—Chris White MP—whose name was chosen at random by ballot to propose a new law.) Second, following the creation of the OTS and then the 2010 General Election, a relatively settled consensus around the idea that policies could be targeted at social enterprise began quickly to fall apart. New terms and definitions arrived, emphasis shifted and new rivals to the idea of social enterprise emerged at a policy level. Of course, the co-operative movement has always been distinct but overlapping with social enterprise (Boeger et al, chapter 18 herein) but many in the co-operative movement had been content with the policy focus on social enterprise and to position themselves within a wider social enterprise movement if that meant they had officials caring about them in central government. As Ed Mayo, Chief Executive of

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Co-operatives UK has said: ‘Co-operatives are social enterprises … They’re social enterprises with members’ (Mayo, 2012). Equally, as also observed above, there has always been some tension and overlap between social enterprise on one hand and the voluntary and community sector on the other, especially in terms of their roles in public service markets. Government attempted to overcome this confusing overlap through the creation of the OTS, putting the two agendas under one roof. Similarly, this was also accepted by many voluntary sector representatives of as part of the deal for being positioned at the heart of government machinery, and in any case, social enterprise had its own team with OTS. But this tidying up and consensus was followed by, perhaps inevitable, ­balkanisation after 2009 through: —— the arrival of the ‘mutuals’ agenda under both Labour and the Coalition ­Government (Cabinet Office, 2010); —— the arrival of terms such as ‘social ventures’ which seem to have emerged as a result of the influence and language of the venture capital industry or excitement about the technology start-up industry; —— the increasing policy focus on social investment but relatively slow deal flow increasing pressure from investors to widen the definition of the investees in the market—leading to the idea of so-called profit-with-purpose or missionled businesses (Department for Culture, Media and Sport, 2016) in a space beyond more tightly defined social enterprise; and —— the arrival of new ideas, such as the sharing economy, and the emergence of other terms—such as community business as championed by The Power to Change trust—although the rationale for, and origin of, these terms is not always evident. Finally, greater devolution for Wales and Scotland under Labour, followed by more devolution to regions and cities under the current administration means that Whitehall policy has become decreasingly significant for increasing numbers of us. At the same time, other policy ambitions may be advanced or curtailed by EU laws, as Ministers have found when confronting State Aid law in developing Big Society Capital (European Commission, 2011) and other social investment funds. So while many look to the UK as leading the way in social enterprise policy development, the reality is that the path is no longer being followed here in the UK. There has not been a programme of policies explicitly targeted at social enterprise emerging from Whitehall for nearly 10 years. The Office for Civil Society has now moved into the Department for Culture, Media and Sport, a relative backwater. This is a move which seems to combine the worst of both policy worlds, with no responsibility for social enterprise in either the Department for Business or the Treasury while also leaving none in the powerful centre of Whitehall.

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IV.  Popular Perception While the popularity of social enterprise has somewhat risen and fallen in Westminster and Whitehall, the trend across the country more widely is somewhat different. In summary, at the turn of the millennium, social enterprise leaders, sector representatives and policy-makers were frustrated by the lack of public awareness and understanding of social enterprise. Now, nearly 20 years later, we are still frustrated but just not quite so much. We have made some headway, just rather slowly (Mangan, chapter 15, herein). The first social enterprise action plan from 2002 described how we need to be able to demonstrate the current and potential contribution of the sector to the UK economy and to the delivery of social objectives. We need to engage in active promotion, to give a higher profile to the sector and help spread understanding. Raising awareness and celebrating success and entrepreneurial achievement is important. The sector also needs to come together to make social enterprise stronger and more visible (DTI, 2002).

Over 10 years later, a study by Key Fund concluded that ‘More than three quarters of the British public are supporters of social enterprise, but only around one in five know what a social enterprise actually is’ (Jervis, 2013). Similarly, social enterprise experts and leaders have been talking for nearly two decades about how social enterprise is now poised to go mainstream: this will be our year. A number of initiatives have, however, together made some impact on raising public consciousness and understanding of social enterprise. These include: —— The Cabinet Office’s Ambassadors programme and other governmentsponsored awareness raising initiatives, such as support for Social Saturday (www.socialsaturday.org), for example; —— The financial crisis and a number of corporate scandals prompting people to think more consciously about the social responsibility of business, ethical practices, pay ratios, taxation, etc; —— Social Enterprise UK’s Social Enterprise Places drive, modelled on the Fair Trade Town phenomenon, raising awareness of social enterprise across the UK; —— Efforts to badge social enterprises consistently, through the Social Enterprise Mark or Social Enterprise UK’s member badge, for instance; —— High profile television programmes featuring explicitly labelled social enterprises, such as Jamie Oliver’s Fifteen and The People’s Supermarket; —— Continued and arguably increasing press coverage of social enterprise in the Evening Standard, Guardian, Independent and other newspapers; —— Successful individual social enterprises reaching the public consciousness, such as Assemble CIC winning the 2015 Turner Prize. This recognition for social enterprise has been made easier by the rough c­ onsensus around the more or less consistent definition of social enterprise shared by

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s­ uccessive UK governments, national and local membership bodies, the European Union (European Commission, 2014) and others. The establishment of Social Enterprise London in 1998 and the Social Enterprise Coalition in 2002 (both now under the wings of Social Enterprise UK) helped protect this definition and rallied like-minded member organisations around an agreed position, making it harder for those who disagree with the definition to undermine it (Brown, 2007). While in the mid-2000s, there was still significant contention around the meaning of social enterprise and some scepticism from the traditional voluntary sector towards the term, with the formalisation (if not legal definition) of the term by powerful institutions and funding streams or kitemarks tied to this definition, the debate has settled somewhat. Where disagreement continues, it is rather less about the meaning of the term and instead, about its usefulness, often driven by a few vocal figures in the social investment industry who are less concerned with ownership and limits on the distribution of profits. The term itself is now relatively uncontested. The evidence suggests that social enterprises are indeed now more widely understood. Social Enterprise UK report that the majority of the general public (51 per cent) are aware of social enterprises in 20161 compared with 37 per cent in 2014.2 In 2008, only one in five (20 per cent) British adults were aware of social enterprises (Cabinet Office, 2008). However, many within the social enterprise movement remain frustrated by the ongoing awareness struggle and the sense that we are still to breakthrough to the mainstream. In 2002, Patricia Hewitt said ‘I believe we now have a real opportunity to create a much larger mainstream social enterprise sector in Britain’ (DTI, 2002). Yet today, why are social enterprise leaders and representatives still so rarely featured, if at all, on Newsnight, Question Time or The Today Programme, for instance, in Take a Break magazine or the Daily Mail? Each time one of us has to explain social enterprise to a newcomer, it feels like so little progress has been made. It is sometimes hard to remember that it is through these very conversations and explanations that we are indeed making progress, however slowly.

V. Practice It is in the practice of social enterprise that we can most take heart. Social enterprise has always been first and foremost about real endeavour, concrete change and, by definition, an economic and social undertaking, not a speech, a theory, a

1  All figures, unless otherwise stated, are from YouGov Plc. Total sample size 2,006 adults. Fieldwork undertaken 29–30 September 2016. Survey was carried out online. Figures weighted and representative of all GB adults (aged 18+). Full results available on request. 2  Survey carried out online by YouGov Plc. Total sample size 2,070 adults. Fieldwork undertaken 19–20 August 2014. Figures weighted and representative of all GB adults (aged 18+). Full results available on request.

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government publication or a television programme, although of course these can help (or indeed hinder) progress. The practical success of social enterprise over the last 20 years has been remarkable. In the face of recent economic and fiscal pressures, a financial crisis and recession, and despite scepticism and even attack from mainstream business or those attached to statutory models of welfare and public service provision, social enterprises have thrived. The overall figures suggest significant growth in the number and turnover of social enterprises across the UK. The official government-backed figure has grown from just a few thousand to 70,000 to over 100,000 and eventually to more than a million, although much of this is to do with adjustments to methodologies ­(Cabinet Office, 2016). More credibly, the real numbers have probably risen from the low tens of thousands to at least 70 or 80,000 social enterprises and more, contributing many billions of pounds to the economy and employing hundreds of thousands of people. There are now over 11,000 Community Interest Companies in just over a decade and a handful of healthcare spin-outs alone are turning over around a billion pounds per year between them (Boeger et al, chapter 18, herein). Evidence from Social Enterprise UK suggests that these businesses, perhaps counterintuitively, seem to be thriving in commercial terms. While classical economists or hard-nosed business folk sometimes perceive social enterprises as soft touch, sub-commercial and not sufficiently focused on the financial bottom line, the evidence suggests they are outperforming more financially motivated businesses at their own game. In the UK, at least, they appear to be thriving, outperforming their mainstream SME counterparts in nearly every area of business: turnover growth, workforce growth, job creation, innovation, business optimism, and start-up rates (Social Enterprise UK, 2015), despite, or perhaps even because of, their social missions. Social Enterprise UK data suggest that close to half (49 per cent) of all social enterprises are under six years old and 35 per cent are three years old or less: this is more than three times the proportion of SME start-ups. The proportion of social enterprises that grew their turnover over the most recent survey period was 52 per cent, greater than the figure for SMEs more widely (40 per cent) (Social Enterprise UK, 2015). In the most recent survey, the proportion of social enterprises that export or licence has grown to 14 per cent. The number of social enterprises introducing a new product or service in the preceding 12 month period was 59 per cent compared to 38 per cent among SMEs more widely. These figures are not a one-off— the last three SEUK surveys have all shown a sector which is growing faster, and is more optimistic and more innovative than the average business. Considering more social metrics, social enterprises have a more inclusive and diverse leadership with 40 per cent of social enterprises led by women; 31 per cent with Black Asian Minority Ethnic directors; 40 per cent having a director with a disability. These figures are all higher than SMEs as a whole. 41 per cent of social enterprises created jobs in the survey period compared to 22 per cent of

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SMEs. And the average pay ratio between social enterprise CEO pay and the lowest paid is just 3.6:1 compared to 150:1 among FTSE 100 CEOs (Social Enterprise UK, 2015). This is a thriving, diverse group of enterprises, working in more markets than ever before. Spin-outs from the public sector are surviving and thriving, despite the worst fears of this author and others. Community-owned social enterprise shops have an astonishingly low failure rate at just a few per cent compared to failure rate for businesses and retail businesses in the wider economy. While we have witnessed various scandals and catastrophic failures in the financial sector, in statutory health and social care services, in big business and the traditional charity sector, we have so far avoided these types of high profile scandals and failures in the social enterprise sector. Of course, social enterprise still faces considerable challenges, sometimes just like other businesses and sometimes unique to their circumstances. These include access to funding and finance, skills shortages, lack of access to business support, the economic climate, public sector commissioning and so on (Social Enterprise UK, 2015). It is perhaps worth noting that the challenge of access to finance has been somewhat overstated in recent years, leading to disproportionate policy responses which have made relatively little difference to the vast majority of social enterprise in practice. Research often conflated access to funding (income, grants or revenue) with finance (capital, investment or loans). As Nick Temple of Social Enterprise UK notes with regard to SEUK’s own research, ‘These questions about finance have become more in depth and nuanced’ (Social Enterprise UK, 2016) over time. He continues, What the improved disaggregation of questions has given us in 2015 is a clearer view that although obtaining grants (25%) and obtaining debt and equity finance (13%) and the affordability of that finance (6%) remain significant barriers, they are matched in significance by other related areas (Social Enterprise UK, 2016).

It is hoped that policy and politics can more helpfully respond to the diversity of practical challenges faced by social enterprise over time and move away from the current government’s preoccupation with social investment. In any case, however policy and politics has evolved, social enterprises have thrived in practice regardless over the last decade and more. We now see social enterprises in mainstream corporate supply chains, on Virgin Atlantic flights and on the table in restaurants up and down the country, in our kitchen cupboards, on the high street and powering our homes. This is where the movement has truly taken off.

VI. Conclusion To this author, it seems social enterprise as a movement has perhaps had its moment in political circles, at least for now. Policy too, has evolved and we are no

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longer the flavour of the month. We have made some ground in the minds of the public at large but not nearly enough. But regardless of this, in practice, where it really matters, our movement is thriving and inspiring. 2016 has taught many of us that predicting the future of politics is futile. But it seems reasonable to suggest that some combination of the following conditions might be required if social enterprise is to recapture the political zeitgeist: —— Conventional ‘neoliberal’ economics-as-usual comes under fire from social conservatives who currently hold considerable political power, including influential parts of the Conservative Party and/or UKIP; —— Influential politicians on the economic left increasingly think more ­creatively—beyond a twentieth century public versus private dichotomy—so that ideas around the social economy are no longer confined to the political fringes and journalists such as Paul Mason but are taken on more wholeheartedly by Labour, the SNP, Plaid Cymru, the Greens and powerful regional City Mayors. —— The question of ownership re-enters the political arena, perhaps inspired by the Brexit message of Taking Back Control, or by Labour revisiting Clause IV perhaps, through corporate scandals or failures of public service outsourcing and the influence of pressure groups such as We Own It. On one hand, politics is the starting point. For social enterprise policy to be reinvigorated, a political shove from above is likely required. Similarly, public awareness of social enterprise will also partly be driven by political energy. Sometimes this is for better and sometimes for worse—the unions, for instance, have been more sceptical of social enterprise than one might imagine as they have heard conservative politicians such as Cameron or Francis Maude refer to its potential, fostering distrust of the idea in parts of the left. Similarly, some, often on the right, see social enterprise as a wishy-washy Blairite neither-one-thing-nor-the-other. Warren Buffett, for example, has said ‘I think it’s tough to serve two masters … I would rather have the investment produce the capital and then have an organization totally focused on the philanthropic aspects.’ While Marc Andreessen, a ­venture capitalist, has said that social enterprise is ‘like a houseboat. It’s not a great house and not a great boat’ (Bank, 2014). So, one tempting conclusion for those of us who advocate on behalf of social enterprise is to give up on politics and policy. It’s a mugs game trying to second guess politics, let alone influence it, while policy and public awareness cascade in part from politics. Perhaps all we can really do is build practically from the ground up. This is truly a grassroots movement. Across the UK we are creating and growing more democratic, fairer, more diverse, more innovative and more inclusive businesses, distinct and popular for how they trade, not what they call themselves. Social enterprises in all their forms have always been with us, regardless of definition and terminology, and of the words of politicians, policy wonks and PR folk. But there are now more social enterprises than ever before, making a more significant positive contribution to life in the UK.

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The social enterprise movement can truly be proud of what it has achieved so far in the twenty-first century, often against the odds but always thanks to the dedication, passion and commitment of social entrepreneurs doing tough and amazing work every day. We are the change.

References Bank, D (2014) ‘Bill Gates is Putting his Own Money into a Small Impactinvesting Fund Focused on India’, http://qz.com/297097/bill-gates-unitusseee-fund-impact-investing-fund-focused-on-india/. Big Society Capital (2011) http://europa.eu/rapid/press-release_IP-111573_en.htm. Boeger, N et al, chapter 18 in this volume. Brown, J (2007) ‘Defining Social Enterprise’, www.huckfield.com/wp-content/ uploads/2014/05/02-Brown-Defining-Social-Enterprise.pdf. Cabinet Office (2008) Research carried out by the Central Office of Information. Full results available on request (not available online). —— (2010) ‘Francis Maude launches Pathfinder mutuals’ www.gov.uk/ government/news/francis-maude-launches-pathfinder-mutuals. —— (2006) ‘Social Enterprise Action Plan: Scaling New Heights’ http:// webarchive.nationalarchives.gov.uk/20070108124358/http://cabinetoffice.gov. uk/third_sector/documents/social_enterprise/se_action_plan_%202006.pdf. —— (2016) ‘Social Enterprise Market Trends’ www.gov.uk/government/uploads/ system/uploads/attachment_data/file/507236/SOCIAL_ENTERPRISE-_ MARKET_TRENDS_2015.pdf. —— (2009) ‘Social Enterprise Summit’ http://webarchive.nationalarchives. gov.uk/20090609095125/http://cabinetoffice.gov.uk/media/210555/summit_ report.pdf. Department for Culture, Media and Sport (2016) ‘Advisory Panel to Missionled Business Review: Final Report’ www.gov.uk/government/publications/ advisory-panel-to-mission-led-business-review-final-report. DTI (2002) ‘Social Enterprise: A Strategy for Success’ http://webarchive. nationalarchives.gov.uk/20040117044730/dti.gov.uk/socialenterprise/. European Commission (2014) ‘Social Enterprises: Report Presents First Comparative Overview’ http://ec.europa.eu/social/main.jsp?langId=en&catId= 89&newsId=2149. European Commission, ‘State Aid: Commission clears aid for the creation of Big Society Capital’, http://europa.eu/rapid/press-release_IP-11-1573_en.htm. Floyd, D (2012) ‘Ed Mayo: Values, Trust and a Team Approach’ www.pioneerspost. com/news/20121017/ed-mayo-values-trust-and-team-approach. Healthwatch (2014) ‘Understanding the Legislation: An Overview of the Legal Requirements for Local Healthwatch’ www.healthwatch.co.uk/sites/healthwatch. co.uk/files/a-guide-to-the-legislation-affecting-local_healthwatch.pdf.

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Haugh, H and Kitson, M (2007) ‘The Third Way and the Third Sector: New Labour’s Economic Policy and the Social Economy’ https://michaelkitson.files. wordpress.com/2013/02/haugh-and-kitson-cje-2007.pdf. HM Treasury (2002) ‘The Role of the Voluntary Sector in Service Delivery’ http:// webarchive.nationalarchives.gov.uk/+/http:/www.hm-treasury.gov.uk/ccr_ voluntary_report.htm. https://weownit.org.uk/. Huckfield, L (2015) ‘NCVO—the National Culling of Voluntary Organisations’ http://www.huckfield.com/blog/ncvo-the-national-culling-ofvoluntary-organisations/. Jervis, J (2013) ‘Social Enterprises: Popular but Confusing, says Study’ w w w. t h e g u a r d i a n . c o m / s o c i a l - e n t e r p r i s e - n e t w o r k / 2 0 1 3 / j a n / 0 8 / social-enterprise-popular-confusing-study. Jowell, T (2009) ‘Why Mutualism is the Way Forward for Public Services’ www. theguardian.com/commentisfree/2009/dec/14/mutual-interest-public-services. Mangan, A, chapter 15 in this volume. Ministry of Justice (2014) ‘Voluntary Sector at Forefront of New Fight against Reoffending’ www.gov.uk/government/news/voluntary-sector-at-forefront-ofnew-fight-against-reoffending. Public Services (Social Value) Act 2012 http://services.parliament.uk/bills/201011/publicservicessocialvalue.html. Royal College of Nursing (2007) Policy Briefing 03/2007 www2.rcn.org.uk/__data/ assets/pdf_file/0006/287736/03-07_social_enterprise_update.pdf. Social Enterprise UK (2017) www.socialenterprise.org.uk/what-is-it-all-about. —— (2016) ‘Prospecting the Future: Social Enterprise and Finance Data from 2011-2015’ http://socialenterprise.org.uk/uploads/editor/files/Publications/ SEUK_ProspectingtheFuturereport2016_V5.pdf. —— (2015) ‘State of Social Enterprise Report 2015’ www.socialenterprise.org.uk/ advice-services/publications/state-social-enterprise-report-2015. Somers, A (2013) ‘The Emergence of Social Enterprise Policy in New Labour’s Second Term’ https://research.gold.ac.uk/8051/1/POL_thesis_Somers_2013. pdf. Teasdale, S (2010) ‘What’s in a Name? The Construction of Social Enterprise’ www. birmingham.ac.uk/generic/tsrc/documents/tsrc/working-papers/workingpaper-46.pdf. The Community Interest Company Regulations (2005) www.legislation.gov.uk/ uksi/2005/1788/pdfs/uksi_20051788_en.pdf. www.socialsaturday.org.uk/. www.socialenterprise.org.uk/policy-campaigns/latest-campaigns/socialenterprise-places.

18 Lessons from the Community Interest Company NINA BOEGER, SARA BURGESS AND JULIE ELLISON

I. Background The Community Interest Company (CIC) is a corporate legal form tailored to social enterprises in the UK. When it was introduced in 2005, the CIC model was a legal innovation.1 The concept of social enterprise already existed in Britain,2 and the idea of merging aspects of community activism and business entrepreneurship in more structured ways began to have wider appeal among innovating individuals and organisations, and within the Labour government at the time (Somers, 2013). However, the choice of legal forms available to turn these ideas into practicable organisations was limited. The corporate options were restricted to standard companies limited by shares or guarantee, but many of these were committed to the interests of their shareholders. Charities, on the other hand, were closely regulated to deliver a social good, with adequate asset locks to ensure their charitable purpose, but they were usually less entrepreneurial than corporate models. The charitable option allows for tax breaks but it also means a loss of control over the organisation’s governance to a board of trustees, an option that many founders who considered themselves social entrepreneurs found unattractive. Between these two alternatives, industrial and provident societies were sometimes an ­effective alternative to set up cooperative social businesses, but they did not always match social entrepreneurs’ needs and did not provide an adequate asset lock. This meant that though these organisations were initially set up for community benefit, a group of individuals might step in once they were doing well commercially and vote to turn the organisation into a company and extract the assets.

1  Companies (Audit, Investigations and Community Enterprise) Act 2004 and Community Interest Company Regulations 2005 (SI 2005/1788). 2  See Gregory, ch 17 in this volume.

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S­ imilarly, with a traditional company limited by guarantee, it is possible for a group of individuals to get hold of the power structure and change the company’s rules so the organisation is run entirely for-profit (Lloyd, 2011: 32). The CIC model was introduced to allow social entrepreneurs to set up organisations that were not charities but at the same time to be confident that their social purpose would be protected in the future. CICs are uniquely accountable through statutory clauses in their articles of association which include a statutory asset lock that prevents the company from underselling its assets or from paying dividends above a certain threshold (except to another asset locked entity). The social purpose of the company is in this way ‘locked in’ and may not be overridden, even upon dissolution of the company, where assets may only be distributed to another asset locked body. The CIC is a special type of company that piggybacks on general UK company law. To set up as a CIC (or convert an existing company into a CIC), the organisation must register with Companies House as a company either limited by guarantee or by shares (if the latter, it may be either private or publicly listed). Charities may not become CICs. Registering a CIC involves submitting a community interest statement to demonstrate the company is going to deliver a community benefit. The Regulator of Community Interest Companies (the Regulator), based at Companies House, then considers whether the Statement satisfies a community benefit test, which is wider than the one that applies to charities, namely whether ‘a reasonable person considers that the activities being carried on are for the ­benefit of the community’.3 Once registered, the CIC is under a statutory obligation to file an annual CIC report with the Regulator (alongside the annual return and accounts) to show that the company still satisfies the community interest test, and that it engages adequately with its stakeholders in carrying out the activities that benefit the community. CIC reports are placed on the public register and made available to the public. They usually summarise the CIC’s activities over the last year and their benefit to the community, and also include information on stakeholder involvement, directors’ remuneration, dividend payments and the transfer of assets. Most CICs choose to file a simplified version of the report but a detailed version is available for CICs that have more complex financial arrangements. The Regulator has wide powers to publicly monitor CICs’ activities and behaviour. Concerns about the corporate behaviour of a CIC can be reported to the Regulator who has the power to investigate and take action, including a decision to conduct an independent audit at the company’s own expense. The Regulator also has the power to start civil proceedings to intervene in the company’s affairs and to remove and appoint directors. The regulations are less onerous than for charities, but they still set up the structure of a regulated business. They are intended not only to ensure the business probity of CICs, but also to protect the integrity of the

3 

Companies (Audit, Investigations and Community Enterprise) Act 2004, s 35(2).

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CIC brand and to maintain the competitive advantage that registering as a CIC might offer social enterprises. There are now around 12,500 CICs in the UK. Most of them are small or medium-sized businesses but some are larger companies, and the field is increasingly diverse. The Regulator publishes monthly lists of newly registered CICs that illustrate the sector’s growing diversity as new registrations include anything from local shops, cafes, nurseries, sport associations, leisure clubs, art and community groups. Recently, more CICs have formed in the field of community energy and renewable technology (Regulator of Community Interest Companies, 2016: 8). The CIC has also become the standard format for public health spin-outs, some with budgets running into millions, but it is also popular in other public sectors, including education, youth and social care services, leisure facilities and community support. The number of existing CICs continues to grow cumulatively year on year and, according to the Regulator, proportionally fewer CICs dissolve after 21 months (the date when the first annual accounts need to be filed) than ordinary companies; so that if the current trend continues the Regulator anticipates ‘there being around 30,000 CICs delivering community benefit throughout the UK by 2026’ (Regulator of Community Interest Companies, 2016: 9). According to the Regulator, these figures far exceed the expectations at the time when CICs were set up, in June 2005. Parliament back then anticipated just 200 to 300 applications every year, but just over 10 years on, this is roughly the figure of applications the Regulator receives per month. But the CIC is not universally praised. It presents problems, and it is only one of many corporate legal forms that are available to social entrepreneurs in the UK. As the CIC format has matured, other legal forms that accommodate social enterprises have also developed simultaneously. The structure of the cooperative and (charitable or non-charitable) community benefit society is available to operate a social cooperative model, and charitable incorporated organisations have introduced a variance of the traditional charitable format. Many social enterprises also continue to operate as traditional companies limited by guarantee or even as commercial companies limited by shares. B Corp certification is now available for UK-registered companies, a development which is likely to impact on the CIC brand and the development of social enterprises more generally. It is an attractive format to people who wish to set up their business as a ‘force for good’ in the wider community, but who are reluctant to accept the commercial restrictions of an asset-lock and dividend cap that are reversible only upon dissolution of the CIC. The B Corp certification format is less onerous in comparison but does not offer the security of a locked-in social mission, in the same way as the CIC. These are different legal tools but both help individuals to incorporate social purpose and entrepreneurship in a single organisation.4

4 

See Hunter, ch 13 in this volume.

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While not without its limitations, the operation of the CIC model for more than 10 years has produced important lessons on how social enterprises operate, on how to make them successful and how to regulate them. The introduction of the model, that necessitates a particular type of governance, has played a role in the development of the social enterprise movement in the last 10 years, and in the continuing consideration of running business without losing sight of the wider community. Building on these insights, in the following sections we consider some of the lessons concerning the governance and funding of social enterprises, and their ability to demonstrate social impact, which the operation of the CIC model has revealed.

II. Governance The CIC model is often taken up by very motivated passionate individuals or groups with vision and a sense of purpose. Most CICs are small, or even micro businesses, with the founding directors often taking a hands-on role in their work and running. This is not unusual in any new business and especially not in social enterprises, but it can lead to a lack of focus on governance which over time could leave the CIC without a robust strategy on forward planning, potentially compromising the business. As the CIC model has grown and been taken up by more entrepreneurs and organisations, the importance of governance and getting it right has become increasingly recognised. Governance and oversight of the business can be key to its accountability and success but for many setting up a CIC, there is a strong focus on delivering the social purpose that can often have a greater impact on direction and keeping control. Investors and funders on the other hand will want to see evidence of good governance when considering a CIC as a customer. Lack of good governance will be a sticking point in negotiations, and often social investors will also provide an element of business support to a social enterprise to ensure the focus on direction and commitment to a business strategy. Investors will want to know about the organisation, its staffing, governance, financial and business skills, customer base, competition, state of the market, profitability, connectivity, vision, capacity, track record of delivery, performance and impact measurement, reporting on achievement, cash flow and more. Grant funders may want a CIC to add to its governance structure to be sure that their investment is not being managed by a single director or small group of people as part of the decision-making process. This sometimes fails to take account of the fact that smaller boards can make decisions that are more immediate and in the interest of the company. The Regulator’s role is to monitor and support the good governance of CICs (Regulator of Community Interest Companies, 2017). Recently, a governance

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framework for CICs was devised in a partnership project that involved the Regulator and a range of relevant organisations and independent consultants, to provide further guidance to the boards of CICs and more importantly to outline the importance of governance in a clear and simple way for boards that may lack experience or expertise or, more likely, many have simply prioritised day to day operations to keep the business going (Bates Wells Braithwaite, 2015). CIC directors have the same responsibilities as directors of any company, as laid out in the Companies Act 2006, but they are also required to ensure the company maintains its legal responsibilities under the community interest test and to maintain the asset lock and purpose of the company as part of its corporate duties. Unlike other businesses, social enterprises need to balance the dual demands of doing good and doing well financially. There is a risk that commercially successful social enterprises may drift away from their social purpose and undermine both their social impact and their reputation as a social enterprise (Regulator of Community Interest Companies, 2016: 11). Above all, CICs must be transparent in the way they operate and are governed. Governing documents and annual reports go on public record. These companies have taken on a legal (and moral) responsibility to maintain the credibility and sustainability of the business in delivering its social purpose. They have taken on additional responsibility by putting a regulated structure around their activity and are highly accountable for ensuring good business and corporate decisions in the light of this. Failure impacts not only on the company and its directors but on the community of interest and social impact that is the purpose of the activity. Governance in a CIC and any social enterprise requires a range of skills that are unlikely to be found in one person. The minimum number of directors to set up a company is one. If CICs are going to deliver social purpose, make profit for the purpose of the company and thrive they should have a range of skills on the board to enable this. The advantage of a small board however is quick, purposeful decision-making. Each company will have to find an appropriate structure to balance these demands. The need for transparency (and accountability to funders) can force a company to set up a larger board than desired but effective stakeholder engagement (eg a stakeholder council) can help avoid an unnecessarily large board. In small start-up CICs that have no employees, founders should identify who else they might involve in their governance. The CIC format leaves individual companies the flexibility to decide how they consult their stakeholders. There is a view that more standardised stakeholder engagement processes should be introduced, and the CIC model should be more prescriptive in formally committing companies to these processes. Flexibility on the other hand is important as it allows social enterprises to develop innovative and effective ways of involving their stakeholders in the strategy of their business (eg one director might be a user representative, or they might set up a separate body to advise the board) (Bates Wells Braithwaite, 2015: 17). The CIC report, which is placed on public record, is a means of assuring stakeholders that the CIC

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engages in activities that benefit the community and it also provides public information on how CICs have developed stakeholder engagement strategies. The requirement of transparency is integral to the CIC model. The Regulator has wide powers to hold CICs to account publicly though it has so far exercised some restraint in using them. It rarely makes any complaints about individual CICs public, unlike the approach taken by the Charity Commission, where complaints about individual charities are usually followed up by a public inquiry. While there is a view that the Regulator’s light touch is impotent, it should also be noted that there is no requirement for a social enterprise to be a CIC. The model on the whole attracts a certain kind of social entrepreneur, and the lack of headlines to date, about failure and poor behaviour by CICs, attests to this. According to the Regulator, recent complaints have addressed the conduct of directors, delivery of community benefit, financial mismanagement, unpaid invoices and asset transfer, but overall complaints are rare. In 2015–16, with just under 12,000 CICs on public record, there were complaints on just 0.44 per cent (Regulator of Community Interest Companies, 2016: 16). In some cases, the Regulator broadened the scope of information required from CICs in the renewable energy ­sector to address concerns that applications in this sector might not fully meet the ­conditions of the community interest test (Regulator of Community Interest Companies, 2016: 9). There is concern that directors could abuse the CIC form by paying themselves high salaries because they are restricted from extracting money as equity (dividend cap) or through asset sales (asset lock) (Lloyd, 2011: 39). But CICs are under the same directors’ remuneration reporting requirements as those of other companies (depending on size of the company and level of remuneration) and in addition, the Regulator has powers to remove directors for inappropriate conduct. The low number of complaints to date is reassuring, though the Regulator does not make the nature of any complaints that have been handled public. There is scope for further research into CIC directors’ remuneration and whether salaries are being used to extract value from CICs.5

III. Investment Developing businesses that grow sustainably and that are attractive to funders is key to the success of CICs and social enterprises generally. Many social enterprises establish themselves in their local communities, but struggle to scale up their businesses, and they tread a fine line between preserving their social purpose and running a sustainable business. According to the Regulator, of those CICs that

5 

The Regulator does not currently keep statistical information on CIC directors’ remuneration.

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eventually dissolve, most do so within the first two years of incorporation and the most common reason cited is the inability to obtain investment and funding. Those that are successful tend to have a strong business plan, are able to demonstrate good corporate governance and target funders that are most sympathetic to their activities (Regulator of Community Interest Companies, 2016: 16). Other funders however still equate CICs to charities, without fully appreciating the commercial side of the CIC model (Regulator of Community Interest Companies, 2016: 11). About three quarters of all CICs are companies limited by guarantee that do not issue shares. Those constituted as companies limited by shares have paid out share dividends substantially lower than mainstream companies; in fact, few have paid any dividend at all.6 Most people who set up CICs do not see them as a vehicle for equity financing but rather as relying on grants, debts and public contracts, but some make the case for the CIC limited by shares, to attract investors with an interest in social impact who can also receive a financial return on their investment. There is resistance to the idea of paying dividends and a view that private gain in this instance does not reflect social purpose, but this should be open to question, when a company has a clear social purpose and reports its impact transparently. In these circumstances, the investment ought to establish a unique relationship that could bring greater social change. Whilst the CIC can and does attract grant funding, it begs the question whether this is the most suitable way of bringing funds into the business, especially when there is such competition across the third sector, particularly amongst charities, for this kind of support; and the CIC is a commercial entity and has other options available to it. Many CICs themselves still appear to be averse to this, possibly because key players are more aligned to the social and community aspect of the business and are more risk averse than their counterparts in ordinary business. This is changing though, and CICs can be an attractive option to social investors with the protection of the asset lock and related additional commitment to the purpose of the company. Social finance and investment in CICs has grown in recent years while legislative changes have taken effect to facilitate this. Following calls from within the sector to increase the CICs’ financial flexibility, in 2014 Parliament approved changes to remove the statutory ‘dividend per share’ cap and increase the interest level for performance-related loans to 20 per cent to make it easier for CICs to attract outside investors.7 Prior to 2014, two caps operated simultaneously to restrict dividend payments in a CIC limited by shares, including an overall cap of 35 per cent of distributable profits, and a cap per share of 20 per cent of the paid-up value

6 

Personal correspondence, Office of the Regulator of Community Interest Companies. Community Interest Companies (Amendment) Regulations 2014 (SI 2014/2483), and for earlier amendments see The Community Interest Company (Amendment) Regulations 2009 (SI 2009/1942). 7 The

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of the share. The first of these remains, but the second has been abolished, enabling CICs limited by shares to pay dividends without investors needing to commit potentially large amounts of money, to encourage more potential investors to come forward. The CIC limited by shares, these days with less restrictions following amendments to the CIC legislation, embodies the more commercial aspect of the CIC model. More CICs are turning to this more commercial way of financing their business, though founders, who often have experience and want to keep control over their mission, continue to be concerned that lenders and shareholders should not become overly controlling (eg by increasing board sizes). Social Investment Tax Relief (SITR), introduced in 2014, is starting to reflect interest from smaller investors who can achieve tax relief for their investment in a CIC (and other asset locked models) (UK Cabinet Office, 2016),8 and it offers people setting up social enterprises access to cheaper capital, potentially without the risk of having to dilute ownership of their company. Many investors and CICs are still uncertain about the nature of SITR (Rotheroe and Lomax, 2016), but it has encouraged more strategic business development, to enable CICs to grow commercially stronger and be more influential, rather than retaining a hybrid status where the company behaves charitably and focuses its income generation on grant income while having the responsibility of a private limited company.

IV.  Public Contracting For many CICs and other social enterprises, contracting with the public sector provides an important potential income stream but they still struggle to access public contracts. Often contracts are simply too large for social enterprises, including CICs, to deliver them; and especially where public authorities look for the cheapest price as opposed to long term value, social enterprises often lose out to larger commercial providers in the procurement. Many also struggle with procurement bureaucracy and risks that are written into contractual terms. These are structural barriers for social enterprises, but the underlying causes are often cultural. Public authorities, increasingly strapped for cash in times of public austerity, have become more risk averse and often focus on short-term cost savings. But things are changing. Increasingly public authorities are taking on board that social enterprises can deliver longer-term social value and integrated (social, environmental and economic) outcomes in ways that many commercial providers cannot, while also conducting their business more entrepreneurially than charities. 8  Organisations must have a defined and regulated social purpose. Charities, community interest companies or community benefit societies carrying out a qualifying trade, with fewer than 500 employees and gross assets of no more than £15 million may be eligible. The scope of SITR has just been raised to £1.5m (for organisations up to seven years old).

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From 2013, when the Public Services (Social Value) Act 2012 came into force (hereafter the ‘Social Value Act’), public authorities have been under a legal obligation to consider economic, social and environmental well-being of the wider community, as opposed to purely commercial value for money, before procuring larger public service contracts with a value above the EU procurement thresholds (Boeger, 2017).9 Their duties are soft—the Act does not impose an obligation to act upon these considerations—and they only extend to larger public service contracts but not to the procurement of works and goods or smaller service contracts. There is room to argue that the Act should be strengthened further and more statutory guidance issued, but emerging research suggests some public authorities are embracing the principles of the Act more widely and have begun to procure all their goods, works and services in ways that are less bureaucratic and more focused on sustainable outcomes for the benefit the wider community, and that are therefore more accessible to smaller and social enterprises. Can being a CIC make it easier for a social enterprise to access public sector contracts? On the one hand, the legal structure provides assurance to the public authority that social and commercial interests are integrated in the CIC organisation. The CIC’s formal commitment to account to its stakeholders and the ‘lockin’ of this social purpose do offer public authorities a degree of confidence that the CIC provider will take account of the wider interest of the community and not just the interests of its shareholders when delivering the contract. Many public authorities, on the other hand, still lack awareness of these and other benefits that the CIC format can offer and there remains a misconception among some that CICs are essentially ‘like charities’, not commercial organisations. According to the Regulator (Regulator of Community Interest Companies, 2016: 11): [T]he misperception of social enterprises as wishy-washy dogooders remains among parts of the private and public sectors. Some social entrepreneurs feel that they have to work that much harder to establish themselves in a commercial world.

The role of the CIC as a vehicle for public service spin-outs has given them a greater public profile and helped address these misperceptions to an extent. Most of the largest CICs are public service spin-outs, mostly in the public ­healthcare sector, and it is not uncommon for these organisations to ­operate on a multimillion-pound budget, with several hundred employees. Spin-outs (or ­public service mutuals in England) were introduced around 2008 as an alternative to traditional public service outsourcing. Although it was a Labour government that introduced the spin-out model, the Coalition and now the Conservative government have continued it. The process involves setting up a new entity that is owned and controlled by staff, or a joint-venture between employees who own the new company; the public body (eg a local authority or NHS commissioning body); social investors who provide money; and users who will play a more active role

9 

Public Services (Social Value) Act 2012, s 1(3).

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in the ‘spun-out’ service. Structurally, the spin-out is similar to a management buy-out, with the difference that the resulting organisation is a social enterprise— usually a CIC—rather than a conventional company, owned by all staff and set up for a social purpose. The growth of spin-outs has boosted the presence of social enterprises, and in particular CICs, in the public service sector, but it also underlines the importance of strong legal structures, effective regulation and good governance. Usually, the motivation for setting up a spin-out is to improve services and deliver them more cheaply—to provide better value—than the bureaucracy of the public sector could manage. The motivation is the same as for full privatisation, even if in the case of a spin-out staff and/or their managers are often the key drivers (and the alternative to spinning out is often full outsourcing or a closing of the service altogether). In these circumstances, the CIC’s protection against ‘mission drift’ away from its original social purpose, especially the asset lock on restrictions on profitdistribution, stand between public service ‘mutualisation’ where social interest is central, and full privatisation involving providers that are driven exclusively by commercial profit and shareholder value.

V.  Social Impact In recent years, with the wider availability of social investment and introduction of the Social Value Act, there has been an increasing demand for social enterprises, including many CICs, to demonstrate their social impact, namely, what effect their activities have on the relevant communities in which they operate, including the well-being of individuals and families. This interest is not new. In fact, it is something the sector has been addressing for over 25 years, and there are plenty of products on the market to measure social impact, designed with social enterprise in mind (McLoughlin et al, 2009). But despite the saturation of impact measuring tools, methodologies and best practice, a sense of confusion continues and, related, there are still calls for more standardised procedures. At its core, social impact measurement uses the data collected about an organisation’s activities to measure the change to people’s lives and the environment, and how that change benefits society. Like charities, most social enterprises are familiar with monitoring, evaluating and reporting on their activities. But when it comes to measuring their impact and outcomes (the extent of behaviour change and the value it brings to society), the picture is more complex, and it is evident from their publicly available annual reports that currently only a minority of CICs are measuring their impact using independently verified standards. There are several contributing factors why social enterprises, including many CICs, have found it difficult to identify or to follow agreed-upon methodologies for social impact measurement. One reason, it has been suggested, is the character of social enterprises as organisations that are accountable to a diverse set

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of stakeholders ‘with disparate expectations and understandings’ (Molecke and Pinkse, 2017), whereas the accountability of traditional firms extends largely to their owners and shareholders. Further, the expectations of those to whom social impact assessment is primarily addressed, including social investors in the private or funding authorities in the public sector, are not always consistent. Recent research into the application of the Social Value Act at local authority level for example suggests there is still much uncertainty in how councils identify, measure and assess social value in their public service commissioning in procurement practice; producing ‘a quite complex picture with councils using the Act in a myriad of different ways’ (Social Enterprise UK, 2016). There have also been calls for the Regulator to begin to standardise processes and make social impact measurement compulsory for CICs when they discharge their statutory obligations to submit an annual report and accounts; although taking into consideration the diversity of companies now registered as CICs, from individual social entrepreneurs to large (formerly) public sector spin-outs, the benefits of any moves towards standardisation should be carefully assessed. But there is a deeper structural reason why measuring social impact is a matter of some complexity today. Different traditions of social impact measurement have shaped this practice in Britain, and the tension, at least in part, between their divergent approaches continues to be relevant today. An important tradition can be traced back to George Goyder’s work, which initially introduced the ‘social audit’ in an effort to make business more accountable to society at a time of rising globalisation (Goyder, 1961). By the early 1990s, the social audit movement was gaining traction in Britain, particularly amongst cooperatives and community enterprises looking for ways to communicate their social and environmental impact to their internal and external stakeholders. Influential in the context of this movement was also John Elkington’s work, throughout the 1990s and 2000s, on developing social accounting along a ‘triple bottom line’ where financial data is seen as only one element alongside social and environmental outcomes (Elkington, 2004). Despite its financial roots, the theory behind the social ­ ­accounting process, as with the social audit, questions the necessity to reduce all meaningful information to financial form. Responding to genuine interest in standardisation of impact measurement a group of cooperatives, community enterprises and practitioners established the Social Audit Network (SAN) in 2000. SAN combined and adapted the social audit and the ‘triple bottom line’ approach to accounting in order to create their own Social Accounting and Auditing process, for which they wrote a manual which is periodically updated, and they began to train practitioners and introduced an independent verification process (Social Audit Network, 2017). However, even during the early years, it became apparent that the process was onerous especially for smaller organisations who found it difficult to manage the additional work it required, and SAN has struggled to mainstream the product. A new approach to social impact measurement began to develop and gain traction in the mid-2000s, as new entities were joining the social enterprise movement,

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including the CIC. At EU level, the Work Integration Social Enterprise (WISE) (Davister et al, 2004) attracted interest and renewed curiosity in impact measurement, due in part to the EU-funded EQUAL programme, meant that many nonprofit organisations across Europe started experimenting with different impact measuring methodologies and tools. Social audit and social accounting became one amongst many such tools. During this period, in response to the diverse needs of a growing social enterprise sector both nationally and internationally, customised measures for specific types of impact were being introduced, including indexes and scorecards such as the Grameen Foundation’s Progress out of Poverty Index or the Impact Reporting and Investment Standards.10 Some of these methods focused on measuring specific impacts, but others sought to measure the efficiency and validity of the activities a social enterprise performs to generate social impact, including methods based on logic models and theories of change (Rogers et al, 2000). In the UK, the New Economic Foundation began testing an adaptation of a conventional business tool—‘return on investment’—to develop a new instrument for measuring social impact: Social Return on Investment (SROI) (Gargani, 2017). The process for collecting evidence of SROI is similar to those used in social accounting and auditing, but SROI maintains the principle that all impacts can be given a meaningful financial value. To a growing social investment market, being able to quantify the value of a social impact in financial terms was, and still is, an extremely attractive proposition, and in 2008 the UK Government began funding the development of SROI. It signalled a preference for SROI over other methodologies, including the more developed social accounting and audit. However, there are downsides to SROI, including cost and complexity. To be effective, this methodology requires banks of indicators and financial proxies which even today are still being developed. Questions over the methodology’s reliability, especially the risk of potential distortions when converting social into financial value, are the subject of ongoing research (Nicholls, 2017). Based on this evidence and the history of social impact measurement to date, what seems apparent is that a one-size-fits-all solution is unlikely to meet the needs of all social enterprises, including CICs. The tension between the ­financially-oriented SROI and the wider social audit is still ongoing. And questions continue to be raised whether further standardisation is useful: can standardised processes enhance multiple stakeholder engagement? Will these processes increase transparency and accountability without stifling innovation? To add a further dimension, research now indicates that certain social enterprises, including CICs, have openly started to question and ‘delegitimise’ the validity of formal methodologies for impact measurement on the basis that: with these methodologies social impact is immeasurable; data collection is an imprudent investment; the underlying theoretical logic is incomplete to establish the link between inputs, outcomes

10 

See, respectively, www.progressoutofpoverty.org/ and https://iris.thegiin.org/.

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and impact; and the resulting measures are irrelevant to predict future success or guide decision-making (Molecke and Pinkse, 2017). While the social enterprise movement continues to evolve and attract new entrants, the probability that we will see new or ‘blended’ (Emerson, 2003) forms of social impact measurement on the market seems more likely than an imminent agreement on standardised processes. This may in fact be something to welcome. After all, the light-touch regulation of the CIC format is part of its attraction, and it may be necessary for innovation to flourish and create space for entrepreneurs to develop new ideas about what social impact means in their specific context (Carstensen, 2011). As we move forward, the use of Information ­Technology, social media and data analytics will no doubt create another ­paradigm shift, as will the increasing interest from for-profit entities to consider their impact on society, which implies that the practice of social impact measurement is g­ aining relevance beyond the social sector (Molecke and Pinkse, 2017).

VI.  Advice and Awareness Access to adequate advice and guidance is crucial in the development of the CIC model and social enterprises generally. Those wishing to set up a social enterprise are often not sure where to go to find the best vehicle for new start-ups or for growing their existing organisation. Still too many have not heard of the CIC. Solicitors may be able to help outline options enabling them to make a good decision about the best vehicle, but other means of advice are also available through the Regulator, Government and local authorities, commissioning bodies and the wider CIC community. The Regulator also has a role to play in growing public awareness of the CIC brand more generally, and to support a public eco-system that is favourable to the CIC format, including its involvement in the recent CIC legislation review and the CIC framework for governance. In 2015, the 10 year anniversary celebrations saw the Regulator speak at events across the UK to publicise the CIC model and to support existing CICs and address their individual concerns. It has targeted especially local authorities and has encouraged them to better understand the role and purpose of CICs and to apply consistency when considering specific policies such as discretionary rates relief. The annual community interest report provides an opportunity for CICs to showcase publicly what they do and how they measure it, which is not shared by ordinary companies. According to the Regulator, its collection of CIC reports over time have demonstrated that those CICs which are able to measure their social impact, understand their market and can demonstrate strong governance are most successful in attracting funding. The Regulator describes the reporting regime itself as a tool for success, not only because it generates transparency and maintains the integrity of the CIC brand, but also because it makes free data ­available

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to study good practice of how CICs are developing as a business model. It refers to ‘a huge body of evidence which tells the story of CICs and the wider social enterprise movement’ which not only the social enterprise community but also ‘an increasing number of academics and students’ are taking advantage of (Regulator of ­Community Interest Companies, 2016: 10; Nicholls, 2010). Finally, CICs themselves have also taken up the initiative to disseminate their business models and activities in the wider community, nationally and internationally, including in many developed countries in Europe and beyond (eg Korea, Japan, Canada, USA, Australia), and in developing economies that are in need of guidance on CICs. The CIC may have started off as a niche corporate experiment but the UK network, The CIC Association, describes CICs now as an ‘evolution that will change the way people do business in the UK.’11 Especially larger CICs and public service spin-outs reach out to stakeholders, commercial businesses, policy-makers and researchers, working with the public sector to ensure that the CIC format is widely understood, that further funding opportunities are developed and that business talent can be attracted into the sector to grow its impact (Regulator of Community Interest Companies, 2016: 11).

VII. Conclusion The CIC format is attractive to those who believe that there is ‘another way’ to do business and who wish to challenge the paradigm that profit is the only benchmark against which to account for a company’s success. The CIC allows founders to incorporate social activism and entrepreneurship in one organisation. CICs are set up with a social purpose—to ‘do good’ in the wider community—but recognising, too, that investment and entrepreneurship play an important role in enabling this to happen. As the overview in this chapter has demonstrated, questions are left to be answered, and wider awareness is still to be raised, about the benefits as well as the limitations of the CIC form. Some of these are specific to the format itself, and others applicable to the social enterprise sector more widely. Clearly the CIC model does not suit all social entrepreneurs. Some people do struggle with the irreversible character of its legal architecture, including the asset lock, accountability requirements and restrictions on equity, while for others these ‘locked-in’ social features provide welcome assurance that a social purpose will remain embedded in the company. Once a CIC is set up it can only be changed on winding-up; a hard-balancing act, not to be taken lightly. The format is not for every social entrepreneur but even if CICs may not take over the world, the introduction of the model has played a decisive role in the development of the social enterprise movement in Britain for over a decade, and has expanded the idea of

11 

See http://cicassoc.ning.com/.

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running a business without losing sight of the wider community without which it could not exist. The CIC has offered important insights into the operability of a regulated ­business structure that is not a charity. So far, the CIC model offers an encouraging picture suggesting that the regulation of business for social purpose is workable, provided resources within the Regulator are well-balanced and -managed. It does involve making the choice between a commercial orientation whereby the Regulator remains light-touch (its current approach), and an interventionist approach that prioritises the CIC’s social character and their social purpose, for which they ought to be publicly held to account, much like charities. At the same time, the current model also highlights an important paradox, namely that, as Stephen Lloyd remarks, ‘the government has seen fit to appoint a regulator to potentially intervene in the affairs of what will often be small organisations, which it is not prepared to do with the likes of massive oil companies’ (Lloyd, 2011: 38). The CIC’s regulated business structure should be a reminder therefore that nonintervention and ‘market-based’ approaches to corporate governance that rely on ‘comply or explain’ principles and widespread yet often ineffectual voluntary CSR policies, and that are so well entrenched in the UK’s traditional corporate governance model, are not an inevitability. There are choices, and the CIC model is living proof that different alternatives are workable. The CIC structure itself has meanwhile not remained static, and its growing popularity has made apparent that a mission-driven version of the model— prioritising social purpose and reluctant to let in outside finance and control—can be too limiting for many CICs. A more commercial model is gaining some ground within the CIC community. This model suggests there is some room within the CIC format to be more open towards social investment and equity finance, and the financial measurement tools to go along with it, and to be actively seeking a competitive role as public service spin-outs or contractors. This is a fledgling development but the evolving eco-system that surrounds CICs and social enterprises is likely to play a role too in how these shifts will develop into the future; especially the advent of more flexible mission-led business alternatives like the B Corp certification, but also the SITR with potential to further stimulate the social investment market.

References Bates Wells Braithwaite (2015) The Governance of Community Interest Companies—a practical framework, 9 September 2015, available at www.bwbllp. com/knowledge/2015/09/09/governance-for-community-interest-companiesa-practical-framework/. Boeger, N (2017) ‘Reappraising the UK Social Value Legislation’ 37(2) Public Money & Management 113–21.

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Carstensen, MB (2011) ‘Paradigm Man vs Bricoleur: Bricolage as an Alternative Vision of Agency in Ideational Change’ 3(1) European Political Science Review 147–67. Davister, C et al (2004) Work Integration Social Enterprises in the European Union: an Overview of Existing Models, EMES Research Network, Working Paper 04/2004, available at http://emes.net/content/uploads/publications/ PERSE_04_04_Trans-ENG.pdf. Elkington, J (2004) ‘Enter the Triple Bottom Line’ in A Henriques and J Richardson (eds), The Triple Bottom Line: Does It All Add Up: Does It All Add Up?—Assessing the Sustainability of Business and CSR (Oxford, Earthscan). Emerson, J (2003) ‘The Blended Value Proposition: Integrating Social and Financial Returns’ 45(4) California Management Review 35–51. Gargani, J (2017) ‘The Leap from ROI to SROI: Farther than Expected?’ Evaluation and Program Planning, available online 11 February 2017, https:// doi.org/10.1016/j.evalprogplan.2017.01.005. Goyder, G (1961) The Responsible Company (Oxford, Blackwell Publishing). Lloyd, S (2011) ‘Transcript: Creating the CIC’ 35 Vermont Law Review 31–43. McLoughlin, J et al (2009), ‘A Strategic Approach to Social Impact Measurement of Social Enterprises: the SIMPLE methodology’ 5(2) Social Enterprise Journal 154–78. Molecke, G and Pinkse, J (2017), ‘Accountability for Social Impact: A Bricolage Perspective on Impact Measurement in Social Enterprises’ Journal of Business Venturing, available online 26 May 2017, https://doi.org/10.1016/j. jbusvent.2017.05.003. Nicholls, A (2010) ‘Institutionalizing Social Entrepreneurship in Regulatory Space: Reporting and Disclosure in Community Interest Companies’ 35 Accounting, Organizations and Society 394–415. Nicholls, J (2017) ‘Social Return on Investment—Development and Convergence’ 64 Evaluation and Program Planning 127–35. Regulator of Community Interest Companies (2016), Annual Report 2015/2016, available at: www.gov.uk/government/publications/cic-regulatorannual-report-2015-to-2016. —— (2017), Community Interest Companies Guidance Chapters, published August 2013, updated April 2017, available at www.gov.uk/government/publications/ community-interest-companies-how-to-form-a-cic. Rogers, PJ et al (2000) ‘Program Theory Evaluation: Practice, Promise, and Problems’ 87 New Directions for Evaluation 5–13. Rotheroe, A and Lomax, P (2016), New Philanthropy Capital, The Social Investment Tax Relief (SITR): Two Years On, July 2016, available at: www.thinknpc.org/ publications/social-investment-tax-relief-sitr/. Social Audit Network (2017) The New Guide to Accounting and Audit, available at: www.socialauditnetwork.org.uk/getting-started/new-guide-to-socialaccounting-and-audit/.

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Social Enterprise UK (2016) Procuring for Good: How the Social Value Act is being used by Local Authorities, available at: www.socialenterprise.org.uk/ procuring-for-good. Somers, A (2013) The Emergence of Social Enterprise Policy in New Labour’s Second Term. Doctoral thesis, Goldsmiths, University of London, April 2013, available at http://research.gold.ac.uk/8051/. UK Cabinet Office (2016) Guidance on Social Income Tax Relief, updated November 2016, available at: www.gov.uk/government/publications/social-investmenttax-relief-factsheet/social-investment-tax-relief.

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Conclusion NINA BOEGER AND CHARLOTTE VILLIERS This collection of chapters identifies some fundamental problems within our ­economic system and signals possibilities for resolving these problems inspired by the examples in the alternative organisational forms that have been developed. In this conclusion, we outline our vision for the future of our economy and the societal and environmental impacts of the steps we suggest.

I.  Dysfunctional System The concerns leading to the conference and this book on Shaping the Corporate Landscape are serious and deep. As Ireland showed us in the first chapter, the historical development of the shareholder corporation has brought with it some unfortunate features. After observing the growing frequency of corporate scandals that indicate the existence of a deleterious corporate irresponsibility, Ireland makes clear that this irresponsibility is founded on institutional features, especially that of the corporate legal form as currently constituted and the property rights structures of contemporary capitalism. Our treatment of the corporation as a separate legal person has a double-edged possibility, of attaching to shares residual property rights and leading to increasingly financialised companies, or regarding shareholdings as creditor-like and thus leading to less profit-oriented and more socialised corporations. Whilst there have been examples of both, for the time being the predominant feature has been to support the shareholder primacy approach, and this has, as Pearson and Veldman have each observed, used the construct of the separate legal entity incorrectly, and shifted, without legal or theoretical validity or legitimation, the main goal from profit maximising to shareholder money maximising and the creation of a privileged ‘organised money establishment’ through financialisation of the corporate governance institutional structures. The result is an emphasis on shareholder primacy as a dominant social norm that ‘has colonised the space which company law has left open for the boards and, by extension, managers’ (Sjåfjell), and has caused problems of short-termism and rent seeking in a way that has favoured a financial oligarchy that reaps the benefits at the expense of, and through shifting the risks onto, all other corporate constituents and stakeholders, the rest of society and the environment.

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Numerous chapters in the first part of this book have included commentary on the problems involved with shareholder primacy and emphasis on the myth of shareholders as owners of the corporation which has served to justify a narrowly focused company law and corporate governance system. As Pearson suggests, the nexus of contracts model ‘is anachronistic and inaccurate from a legal point of view’ and he argues that the separate legal entity is ‘a construct with a problematic legal and social status and legitimation’ which operates in the exclusive service of the shareholders but the implications for all other constituent groups are ignored. Other misleading claims influence this socially damaging system as well: that economic growth brings wealth to all, that globalisation has benefitted the world, and that regulation can curb the excesses that arise in this financialised framework. In reality, the system in its current state is threatening the existence of the planet as the ‘run-away climate change’ (Sjåfjell) is speeding up and is tearing the social fabric, as the wealthy are getting wealthier and the poor are getting poorer. When we witness extravagant Davos gatherings and we see reputation-damaged corporate executives like Philip Green flaunting his superyacht in the wake of the BHS demise, as well as high level corruption revealed in the Panama Papers, at the same time that an austerity programme has led to food banks mushrooming in the UK, whilst large numbers of refugees live in fear, and in the UK homeless numbers are visibly growing, we consider this to be a system that has gone desperately wrong. Wilkinson and Pickett have demonstrated the damaging effects of this sort of disequilibrium in their work The Spirit Level cited in this book by Pearson and by Hunter. This appears to be the peak of capitalist exploitation and commodification—a system that is unsustainable and appears to have lost its way. We are witnessing ‘an entire economic system that has gone awry’, an arrangement of business and finance ‘which seems to have lost sight of any societal goals and respect for compliance with the law and with generally accepted ethical norms’ (Sjåfjell). Trust has broken down and urgent action is required. For many citizens, there is deep suspicion of the political and corporate systems. The votes in the UK for Brexit and in the US for Donald Trump have been viewed as protests by ordinary working or lower classes against the corporate, political and cultural elites. Talbot describes this as, ‘a “Polanyian” reaction against the disembedding effect of a free market that has sought to increase profitability by shedding labour protection and welfare provision.’ Boeger observes the systemic role of corporate power in political systems which today embrace rather than challenge the logic, values and institutions of shareholder capitalism. This is contributed to by the corporate form which has ‘further enabled dis-embedding through its global fluidity and ability to access the global, low paid workforce’ and which has ‘also put pressure on the labour force to accept poorer pay and conditions’ (Talbot). The protest votes have not so far generated optimism or real signs of change by the political leaders. The current Prime Minister, Theresa May, for example, promises more worker protections but without being prepared to repeal the Trade Union Act or to restore free access to employment tribunals for workers

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to challenge unfair dismissals or discrimination though the Supreme Court has recently ruled that Employment Tribunal fees are unlawful, thus forcing the government to have to scrap the fees (R (on the application of UNISON) (Appellant) v Lord Chancellor (Respondent) [2017] UKSC 51). None of these required reforms were promised in the latest Conservative Manifesto. Instead, political leaders in Europe and the US are responding to calls for greater restrictions against migrants, for more protectionist negotiating styles with foreign leaders and austerity continues as a policy for reducing spending and taxes. It is clear from many of the chapters in the first section of the book that reforms that leave the shareholder primacy model intact are not going to be adequate to restore the trust that has been lost in the corporate governance system and in the political and economic system. These chapters demonstrate a need to reform our company laws and corporate governance systems in a way that tackles the structures and the behaviours of the mainstream corporations, not least because they still directly or indirectly control many key productive resources and they still dominate the economic landscape (Ireland). Merely tinkering with trying to make the shareholders behave more responsibly and with greater commitment either does not go far enough or may even exacerbate the problem because it encourages financialisation and empowers and enhances the proprietorial rights of rentier shareholders (Ireland). Tsagas makes clear the problems with light-touch reforms. The introduction of enlightened shareholder value through section 172 of the Companies Act 2006 illustrated the ambiguities and the ineffectiveness of such responses. More radical reform is required. Talbot advocates making the corporation fit for social purpose by ensuring representation of the labour claim in the corporation, and Williamson proposes a reformulation of directors’ duties as well as establishing representation of workers on company boards alongside representation and voice at other levels of the company. Ireland suggests that we could experiment with different rights-obligations structures and schemes of responsibility. Some of the more radical reforms may require facing up to some formidable conceptual challenges such as the capitalist basis for our corporate activities and political economy. Moreover, whilst the chapters in the first part provide reasons and some suggestions for different generic approaches, such as conceptual experimentation and adoption of more feminised or compassionate approaches to business activity, and creation of more generic sustainable business plans, this first part also identifies some challenges and obstacles. For example, Blowfield points out the need for national and international legal, regulatory and political framework changes that are difficult to achieve or are at risk of corporate capture in the face of the enormity of the potential impact of climate change. Further challenges include the fact that corporations largely influence and shape for themselves the regulations to which they are subject. Talbot notes in this respect the destructive spiral that capitalism has entered and Villiers identifies power dimensions that are problematic within capitalist structures and advocates introduction of a blend of socialist-feminist and compassionate approaches to

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corporate structuring and decision-making processes that encourage more integrative and pro-social judgements and that foster commitment to alleviating the suffering of others (Villiers). Some of these suggested approaches are more in keeping with social entrepreneurship models that are engaged in activities directed towards fulfilling particular social goals. Indeed, some lessons for transformation of traditional shareholder corporations might also be learnt from the experiences of successful alternative models, many of which form the content of the second part of the book. As Boeger suggests to us, ‘the development of counter-models to the shareholder corporation enables society to formulate a response to the latter’s “corporate excess and malfeasance” and the destructive effect of global markets on social and societal standards.’ Thus, another radical reform response might be to present an alternative economic model that takes up and develops some of the possibilities arising from our observations of those various alternative organisational forms presented in this book.

II.  An Alternative Economic Model Whilst it is clear that reform of the mainstream corporate governance and company law framework is required, having been so dominated by the shareholder primacy approach, this framework in its political and economic context provides little inspiration. However, this book contains reasons for greater optimism. The second part of the book contains chapters that present different alternative ­economic organisations that demonstrate successful local community actions, that are innovative and empowering and that have been successful in what might be regarded as a hostile surrounding environment. The different organisations presented show that there is available a wide variety of organisational forms beyond the shareholder corporation. Boeger describes these as a movement characterised by both activism and enterprise. In this book, there are chapters exploring social enterprises that may appear as charities, community interest companies, cooperatives and community benefit corporations, as well as businesses with B Corp certification, and FairShare models. These alternatives are mostly more localised initiatives although they do not have to be. Erdal’s account, for example, celebrates the successes of John Lewis, which is a large organisation with multiple and diverse stores throughout the UK. The chapters highlight the innovation and the variety of business formats that are possible and, brought together, they give rise to the possibility of these different arrangements having the collective potential to be more influential in the political economy, especially as trust has diminished in the mainstream economic arena. What are the features that enable these different models to succeed? The authors identify a number of factors that contribute to the successful endeavours

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of the organisations they focus upon. Erdal, for example, has demonstrated that despite the inaccurate neoliberal predictions of the behaviour of democratic businesses, they flourish better than conventionally structured businesses because they are more productive, since they spread ownership and allow for participative management and they display an ability to sustain jobs better through a recession. Cooper’s case study of the Triodos Bank suggests that an essential feature of accountability is for stakeholders to be able to enter into discussions and influence decisions. Hunter has shown in his chapter that what strengthens a B Corp is its statement of intent and the clarification made to the articles and other constitutional documents that the board will take decisions ‘with a view to furthering the shareholders’ interests in the context of having a material positive impact on society and the environment as a whole.’ This is followed up with a bi-annual B Impact Assessment that requires the board to provide evidence that they are really having that positive external impact. The flexibility and the ability to make profit but with positive external impacts are what distinguish B Corps and this combination could be extended into the broader corporate arena. Kristensen and Morgan describe the highly innovative, socially oriented and competitive cooperatives and foundations in Denmark. They recognise that the contextual background is an important determinant for their prospect of success and that they are more likely to flourish in more equal societies. Mangan highlights the values that are represented by cooperatives—common ownership, mutual self-help and democratic control—and she notes the empowering potential of cooperatives that arises from their principles of education, inter cooperative cooperation and concern for the wider community as well as replacement of competition with cooperation. RidleyDuff advocates a Fair Shares Model which promotes membership for four primary groups in an organisation—its founders, its producers and employees, its users and its financial capital investors. Each of these groups make contributions that ‘entitle them to membership that gives them voice rights and a share of the economic and social returns they create.’ The emphasis is on stimulating social solidarity and on being embedded in a community. Gregory highlights the grassroots nature of the social enterprise movement that is democratic, diverse, innovative and inclusive. For Community Interest Companies, Boeger, Burgess and Ellison remind us that their chief defining feature is the lock-in of their social purpose so that it ‘may not be overridden, even upon dissolution of the company, where assets may only be distributed to another asset locked body.’ This strong asset-lock gives the CIC a strong framework that secures the purpose envisaged by the founders. In summary, the chapters in the second part present an alternative corporate landscape that is characterised by socially-oriented purpose-driven entrepreneurial activity that is more democratically directed, shows greater willingness to show that it is achieving those social purpose goals and is structured to share the benefits more equitably among the multiple stakeholders who are contributing to the activities. Mutual collaboration and cooperation, education and social solidarity are standout features of these different organisational models.

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What can we learn from these examples? The chapters collected in this book communicate a common message: that there are alternative ways of doing things, with more compassion, more care for others and for the environment, with a different purpose that sees profit as a by-product and not as the primary goal, and that empowers people and encourages democratic participation. These alternative organisational forms are largely (but not exclusively) operated through local action, personal involvement, fair share of rewards and democratic ­decision-making. Unlike their corporate counterparts many of these alternative models operate through flatter, less hierarchical structures. In these horizontally, collaborative structures there is room for community, compassion, care and love. It is also clear from the pages in this book that it is possible for an organisation to thrive by emphasising a social or environmental purpose as its primary purpose and that it is possible to prosper in a local and mixed economy alongside large corporations operating in a globalised setting. More fundamentally, a key finding is that our broader economy is a social structure created by human agency and it has room for a variety and diversity of business formats and activities that may benefit all participants. As RidleyDuff remarks in his chapter, ‘Social structures—whilst enduring—are products of human agency and “free will” remains subject to social agreements that constrain practice.’ Similarly, Boeger observes that markets are not the result of an inevitable economic logic but the outcome of ‘individual and collective human choice.’ All of these different formats have shown that more positive, democratic and fairer distributions of benefits are possible. Their procedural and constitutional features distinguish these alternative organisational forms by guaranteeing that stakeholders will be embedded into both the processes and the rewards. This is much stronger and more concrete—and sincere—than the fluffy attempts by corporations to engage with corporate social responsibility which offer no guarantees. Crucially, the alternative businesses seek to create value in which everyone can share whereas the only value pursued in the shareholder companies is that of shareholder profit. Neal Lawson recently described in The Guardian newspaper what being progressive is in political terms. He defined it as ‘being impatient for greater equality, democracy and sustainability.’ He also said that in a political context, the progressive alliance is based on the principle that we make better decisions by working together. Unlike the arrogant view that any one party knows it all and can do it all, we believe there is wisdom to be found in the crowd. The Greens think most about the environment, Labour about work and the Liberals about liberty. This can be a winning political hand. Not least because it starts to help us deal with the complexity of the world we face (The Guardian, 23 May 2017).

We take a similar approach in this book. We contend that our economy can be improved by giving greater space to and facilitating the activities of these alternative forms of entrepreneurship. The challenge is to influence positively the activities of mainstream corporations so that their actions do not impede or obstruct

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the progress made by the alternative organisations. Moreover, how might we extend some of these features to the corporation in order to reduce their negative impacts and to restore some trust in the system?

III.  Next Steps For the foreseeable future, we probably have to acknowledge the likely continuation of capitalism and the dominance of traditional corporations so we need to look for ways to improve their behaviours and graft features from the alternative organisational forms. Some of the features that are identified with the successes of these alternative business models could be transported into the more traditional corporations. Indeed, across the social enterprise landscape it is clear that there are many overlapping features and dual labels. Thus, a social enterprise could also be a community interest company or a cooperative. Hunter talks about the possibility of cross-pollination. However, that possibility might be limited and it might not be possible to change drastically the stated purpose of many existing corporations. Indeed, the invisible hand of the market might resist attempts to do that. Thus, as Erdal remarks, ‘once the private-company economy is in the hands of people who benefit enormously from the existing structure, then an improvement which involves their giving up these benefits will be resisted strenuously.’ Nevertheless, even within existing corporations one first step might be that suggested by ­Kristensen and Morgan, which is to take existing charters seriously and to introduce licensing requirements for activities where social obligations are made explicit. We might also seek to be clearer about the definitions we provide for the models we are advocating and for the goals we are pursuing. Thus, as has been shown in numerous chapters, the different organisational forms need to be defined and described with greater clarity so that all interested participants know precisely what a social enterprise or a B corp is. Similarly, broad terms such a ‘value creation’ require greater clarity so that they cannot then be captured and moulded by groups with vested interests. It is also clear that our economy is required to be healthy in order for our social and environmental needs to be met. However, the constant pursuit of growth is open to question and what this book presents are other goals which require a ­stable economy but not necessarily a growing economy. We could explore the possibility of spreading the ‘circular economy’ described by Blowfield, that comprises ‘a development cycle that preserves and enhances natural capital, optimises resource yields, and minimises system risks by managing finite stocks and renewable flows.’ The circular economy works on the principle of products designed to reduce material usage, to increase opportunities for reuse, and to enable the management of the product’s post-life production. This principle could be broadened to apply not just to product design but to business activities. We require a broad

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and systemic analysis of our markets and our economy and this also requires a ‘regulatory ecology’ as suggested by Sjåfjell. This regulatory ecology approach seeks an understanding of regulation as a ‘complex ecology of direct and indirect modes of regulation that includes law, social norms, markets and architecture, the regulatory impact of the physical world’ (Sjåfjell). This requires an eradication of the current regulatory ecology which Erdal describes as consisting of ‘a whole set of institutions and their opportunist leaders who corner huge flows of wealth’. The goal is to set us on pathways to a safe and just operating space for humanity. This economy has room for more than large corporations and the good examples set by some of the alternative models we have seen described in this book should be duplicated across the economy. Mangan makes clear the need for greater p ­ ublicity and making these alternative models more visible so that new entrepreneurs might be more willing to try them as their chosen entrepreneurial format. We need to challenge dominance of law and economics assertions and beliefs such as shareholder ownership. In this sense Blowfield directs us towards the idea of postcapitalism that is expounded by Paul Mason and involves three key features: collaborative production divorced from traditional business structures and ownership models; the replacement of markets built on resource scarcity with a system that creates value from the abundance of information readily available to almost anyone; and the changing nature of work, particularly because of automation. Indeed, the chapters showcase models that draw on a range of theoretical bases, including Marxist analysis, feminism and ethics of care, and reference the works of writers such as Touraine, Polanyi and Giddens. All of these theoretical approaches merit further investigation. Our book makes clear that this is a systemic problem that affects all of us. It is about humanity—it makes clear that we need to change this system for everyone’s benefit. It is not a ‘them and us’ scenario but one which demands a more solidaristic approach which may comprise care, compassion (Villiers) and love (Hunter). A bad system is damaging for everyone, even those who apparently benefit from it. A more solidaristic system has greater stability, is stronger and sustainable and gives security to everyone. We might look at technology as a future test bed for these ideas. The digital revolution has made possible many of the successes of the social enterprise movement and has the capacity to strengthen democratic efforts. Ridley-Duff, for example, tells us in his chapter that ‘the internet makes it easier to co-produce, co-finance and co-purchase goods through cooperatively managed enterprises and platforms.’ Thus, we have witnessed the positive impact that technology may have. However, we are on the cusp of a new technological revolution with the rapidly developing AI and robotics. Whilst these technologies are exciting and they offer new markets and new opportunities for improving our lives as is documented in Paul Mason’s Postcapitalism they are also terrifying and could become the source of new forms of exploitation and insecurity. This is the time when we should consider carefully who takes ownership of these technologies and we should avoid a

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‘value grab’ or raid of these by the existing financial oligarchy. We should seek a more democratic handling of these technologies. In the immediate term this book, with its positive claims for some of the alternative organisational forms, as well as the recognitions of the challenges that lie ahead, provides a starting point for us to gather further evidence of the activities and the outcomes of more alternative businesses and to expand the range within our investigation. There are numerous successful charities and trusts that could provide further positive examples, such as the National Trust. We also need to explore the conceptual and legal tools that will enable us to grow these alternatives and to spread their features. The advisory landscape is crucially important to this challenge and this work will require platforms for discussion and mutual learning. It is hoped that the political dysfunctions that arise as a result of corporate power and privilege, which are recognised by Boeger, Talbot and others in this book, will be cleared through these forms of entrepreneurial activism and discussion in a way that empowers us all economically and politically so that we will all enjoy a more sustainable and democratic future.

References Andreucci, D, García-Lamarca, M, Wedekind, J and Swyngedouw, E (2017) “‘Value Grabbing”: A Political Ecology of Rent’ Capitalism, Nature, Socialism www.tandfonline.com/loi/rcns20. Lawson, N (2017) ‘A Progressive Alliance is an Idea whose Time has Come’ The Guardian (23 May 2017) Wilkinson RG and Pickett, K (2009) The Spirit Level: Why More Equal Societies Almost Always Do Better (London, Allen Lane).

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Epilogue: Necessity, Organisation and Politics MARTIN PARKER The corporation is a poster child for both sides of a debate about contemporary forms of capitalism and social life.1 For those who believe that we currently live in the best of all possible worlds, the corporation is an elegant legal engine for the efficient allocation of finance, economic growth, technological innovation, employment, the globalisation of peaceful trade and so on. For those who question these assumptions, the corporation is a monster with a legal veil—destroying the local, producing inequalities of income and wealth, externalising its environmental and human costs, and globalising a vacuous culture of consumption (Hadden et al, 2014). It’s easy enough, given this sort of set-up, to take sides, and for these sides to become adversarial and entrenched, stuck in the trenches that they churn around in. In this epilogue, I want to step away from this standoff—though it will be clear enough where my sympathies lie—and make some remarks about the broader issues at stake here. It seems to me that we need to start again if we are going to get anywhere because, as the laconic villager leaning on the fence might tell the bewildered traveller, I wouldn’t set off from here. So, let me start from somewhere else. Human beings are organising animals. Through language and socio-technical arrangements, they build worlds to live in, and the baroque complexity of these worlds is what distinguishes them from the other creatures on earth. What we know of human history and physical and social anthropology tells us that the variety of these human made worlds has been spectacular. Bloody temples to sacrifice, secret organisations that hide their very existence, Kings with the power to erase life with the flick of a pen, circles of gift giving with sea shells across chains of islands, nomads following migrations of animals, glittering cities with towers nearly a mile high, ceremonies involving particular sorts of food prepared and served quietly in houses made from paper. A science fiction catalogue of permutations, of fantastic worlds known and unknown, of teeming forms of life which endlessly mutate into shades of horror and violence, as well as beauty and generosity. I think that it makes sense to start with this sort of ontology of variety for two reasons. One is that it is empirically accurate. (And accuracy is a helpful place to 1 

Thanks to the editors for their comments on an earlier draft of this piece.

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begin any argument.) The diversity of ways in which human beings have associated with each other, and also combined with all sorts of non-humans, far exceeds any similarities, and only the most committed reductionist would assume otherwise. Of course, humans have organised in order to address some eternal problems—what to eat, who to have sex with, how to create shelter and so on—but the ways in which these problems and others have been solved is creative and multiple. There is no straight line of upward development that takes us from ‘then’ to ‘now’, ‘there’ to ‘here’, as if the worlds that we live in at the present moment are ones that were the necessary outcome of a historical process, the one best way to be. My second reason for beginning with variety is political, in the sense that I think that always reminding ourselves that the world is multiple, could be otherwise, does not have to be like this, is a way to ensure that the future is kept open. ‘The political’, in the way that I understand it, and following the post-structural political theorist Chantal Mouffe (Mouffe, 2013; see also Parker and Parker, 2017), is a word that describes the ceaseless conflict over interests that is characteristic of any human society or form of organisation. This is an ontological condition for humans, one that reflects the fact that resources (whether material or cultural) are likely to be limited and hence that there will always be differences of opinion about their distribution and significance. Politics, being a description of meaningful and structured engagements between adversaries, is an inevitable result of the ontological condition of ‘the political’. However, it is in the interest of those who currently benefit from any particular social arrangement to persuade others that the present state of affairs is natural, inevitable, the result of a process of evolution or technological change, or a fair distribution based on the capacities or activities of a particular class of people. Well, they would say that wouldn’t they? It seems to me that as soon as we accept some version of this account of why the world has to be like it is right now, we foreclose politics. Arguments that naturalise or entrench particular organisational arrangements are a way of placing certain sets of assumptions beyond debate, of suggesting that politics can only apply within certain defined domains (like the voting booth or the council house) whilst other decisions have to be left to nature, experts or kings. In terms of the argument I am sketching here, it is an attempt to deny the ontology of the political, and hence to move certain matters to being beyond question. Or, as the hesitancy in the title of this volume seems to indicate, to be potential objects of mere ‘reform’, a gentle revision, rather than questioned in any more radical sense. So if we turn back to the corporation then, and here I am thinking about its contemporary global form, not its rather interesting Medieval version, we can see how it has been a vehicle for the normalisation (or de-politicisation) of certain assumptions. Corporations embed the idea that big is best, that efficiency is related to scale, that efficiency is best understood as the most profit for the least input, that the maximisation of shareholder value is the over-riding imperative or even legal duty, that rent on money is a legitimate way to earn a living, that hierarchy is the optimum way to organise, that substantial pay differentials are required in order to attract and retain talent, that externalising costs is acceptable, and these costs include taxes and the environment, and so on.

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This book, and many others recently (eg Erdal, 2011; Atzeni, 2012; Novkovic and Webb, 2014; Parker et al, 2014; Spicer and Baars, 2017), explore many of the problems with these assumptions, and I think what all of this work adds up is an attempt to disclose politics, rather than foreclosing it. That is to say, in a variety of ways (legal, financial, ethical and so on) this is work which presents us with the possibility that there are many, many other shapes and shades in which organisation might happen. Now, in order to remind you of this fact, because it is a fact, let me take just one example of an organisation that seems to be breaking many rules, but has been thriving for nearly two decades. Premium-Cola2 is an internet collective that grew from the hacker culture around Hamburg, Germany, and which began organising the manufacturing and distribution of a highly caffeinated cola drink in 2001. They have no office, no fixed salaries, and no formal boss—just a moderator who looks after the discussion board. Premium-Cola is only sold in outlets in Germany whose ethos is similar to that of the brand, and they never export outside Germany because of the carbon costs associated with moving the product. Around 1700 partners participate, some more intensively than others, and anyone—whether supplier, distributor or customer—is positively encouraged to take part in decision-making. For some members, Premium is a hobby, for others it is a full-time job. Most importantly, all issues are decided on collectively, and with high levels of discussion and expectations of trust. There are no written contracts, just a general assumption that all decisions must be fair to all the members of the network. This means that they do not aim at growth for its own sake, or at maximising profits by squeezing any other members of the collective. Premium considers itself an ‘open-source economy’ organisation, and is entirely transparent about what it calls its continually revised ‘operating system’ in order to encourage other businesses to use their model. The Premium Collective want to show how it is possible to have a business that assumes equal rights, equal pay and consensus democratic decision-making on every topic that the members regard to be important to discuss. There are no shareholders, no managers who earn more than everyone else, and all the money circulating in the network goes back into the system to ensure fair pay for everyone, including the growers of raw materials, manufacturers, distributors and customers. They aim to produce a fully transparent organisation, with even their bank account being open for all members of the collective to see. Consider a few examples of how this works in practice. Premium have been approached by quite a few companies across Europe who wish to sell their products, or to manufacture them under some sort of franchise agreement. After discussions, the collective decided that they didn’t want to enter into these sorts of arrangements. The carbon costs of exporting outside Germany were simply too

2  www.premium-cola.de/. For research on the organization, see www.premium-cola.de/betriebssystem/wissenschaft and http://wiki.premium-cola.de/betriebssystem/untersuchungen. Thanks to Uwe Lubberman for conversations about the collective.

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high, and they had no interest in being responsible for a franchisee. In any case, they had imagined themselves as an ‘open source’ company, so they simply suggested to the enquirers that they could make the drink themselves, as long as they didn’t export their product into Germany. Premium would supply them with the recipe, as well as all the information about the way that the company organises its business. At the time of writing, Premium are working with a Danish company in order to help them do exactly this. Or, think about the following. Premium use a variety of distributors, and they were approached by one of their larger ones asking for a volume discount. This is not uncommon after all, with purchasers who have substantial buying power and wish to use that to gain some advantage in market terms. Again, this issue was discussed online by the collective. They decided that they didn’t see why an organisation which was already making a lot of money from moving Premium products should be enabled to make even more, so weren’t happy with that idea. However, they were aware of the danger of being overly reliant on a few large distributors, and keen to diversify the range of distributors that they used. As a result, they decided to incentivise smaller distributors by offering them an ‘anti-volume discount’. Now, the smaller distributors pay less for the product than the bigger ones. Both of these examples might seem counter-intuitive to anyone who assumes that a business, with its demands for growth and market share, would always act in order to maximise its profits. Particularly a business that manufactures fizzy sugar water, because this isn’t a company that makes locally-sourced lentil-based snacks. In this case however, the relentless logic of an organisation that wants to be fair, tries to make every decision democratically, and to ensure that everyone involved with the organisation—cocoa growers, hacker customers who want to stay up all night, people who work in a bottling plant, lorry drivers, bar owners— has a say, mean that the decisions are not those that might be expected. Or rather, are not those that might be expected if we assume that all organisations are like corporations. Because they are not. In fact, the corporation is only one form of organising amongst many, many others. Because there are lots of different forms of actually existing organisation—producer co-ops, communes, local exchange trading systems, community interest companies, industrial democracies, partnerships, open source organising, collectives, worker self-management, intentional communities, bartering, feminist separatist groups, anarchists, fair trade, the social economy, B-corps, community currencies, complementary currencies, bioregionalism, self-provisioning, syndicalism, slow food, transition towns, time banks, gift relations, social accounting, the commons, recycling, community energy, permaculture, appropriate technology, city-states, communitarianism, credit unions, ecovillages, consumer co-ops, trade unions, the sharing economy, mutualism, microfinance, fair trade, Islamic finance, syndicalism, social enterprise, bartering, communing … This is a list that, once started, is hard to bring to a stop (Parker, Fournier and Reedy, 2007).

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It might be that forms of organising are as wildly different as our imaginations will allow, as my small example of a German cola manufacturer illustrates. The Brazilian political and legal theorist and politician Roberto Mangabeira Unger captures this nicely as an ‘experimental’ attitude to social organisation (Unger, 1988; Unger 2004). If we assume, he says, that social life is always built from certain ‘formative contexts’, then radical social innovation within any era becomes possible only if these contexts can be ‘denaturalised’, or ‘disentrenched’. That is to say, Unger wants to acknowledge that all knowledge and practice is socially located, at the same time that he insists that it is not socially determined, and that there is no necessary logic to history. He thinks that the biggest danger is what he calls ‘false necessity’, the idea that the world has to take a certain shape because of some suggested laws of human action or development. This is an argument against any particular teleology, and for the collective development of (borrowing the term from John Keats) a sense of ‘negative capability’, the capacity to think in a way that contradicts the formative contexts that we find ourselves in, that imaginatively posit new ways of thinking about ourselves and our social relations. The reason I find Unger’s ideas relevant (and inspiring) here is largely because he insists that everything is political. That is to say, that forms of social organisation should never be treated as somehow outside or beyond politics—driven by mere efficiency or functional necessity—but instead as examples of what I have elsewhere called (twisting a phrase from Bruno Latour) ‘organizing as politics made durable’ (Parker et al, 2017). This term is meant to gesture towards the ways in which any form of organising represents the solidification of assumptions about the capacities of different sorts of human beings, and the relations that they should have with each other. Unger often uses the example of the work organisation in order to explore questions of legitimacy and authority, and to question the necessity of what he calls the ‘English path’ to a particular form of hierarchically managed stockholder company. More generally, he is trying to think against what he calls ‘frozen politics’, the congealing of possibility into necessity, even inevitability. Because once social arrangements are frozen, whether in the shape of a corporation or any other form, they become a sort of solidified common sense, a tableau of static relations. So I don’t think that the problem that faces us is just a question of reforming the corporation, as if this were the only game in town, but rather a wider issue of encouraging organisational experiments and the contexts that make them possible. As some of the chapters in this book show, the legal and institutional frameworks which cradle different organisational forms are vitally important here, particularly those which enable arrangements which are collective in their financing, governance and sharing of gains. More generally though, I believe that we need to begin with a strong assumption about organisational variety, and then evaluate different sorts of institutions in a way that is informed by normative discussions. In this, questions of means and ends become important. A company that manufactures highly caffeinated cola, but does so with remarkably democratic forms of governance, might be compared to a company that produces locally-sourced lentil-based

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snacks, but demonstrates autocratic forms of management and uses precarious labour. Practices and intentions, means and ends, will need to be evaluated separately and together and on a variety of criteria—for example whether they produce community, whether they allow autonomy, and whether they demonstrate responsibility to other humans and non-humans.3 Variety, multiplicity is not a good in itself, but it is the necessary ground for discussions about the normative commitments and consequences of different forms of organising, in just the same way that Chantal Mouffe’s ontology of ‘the political’ is the ground for discussions about political strategy and tactics. This is why I find Unger’s call for a radical extension of politics to be so helpful, because it begins to push back the false necessities that tell us that the world just has to be some particular way. The forms of corporate managerialism which subordinate ethics and politics to assertions about the bottom line are politics too after all, most particularly in their attempt to insist that politics doesn’t belong in the boardroom, on the factory floor, in the supply chain or the supermarket. Organisational arrangements are always politics congealed into rules and routines, the entrenchment of assumptions about who decides and who benefits. In order to compare them, it is necessary to begin by assuming difference and variety rather than uniformity, and continuously interrogating all organisational arrangements for their explicit and implicit politics. The endless turbulence of an ontology of the political cannot be evaded with false necessities, with a brittle and frozen politics, so let’s celebrate and explore multiplicity, and imagine the fantastic worlds we might create together.

References Atzeni, M (ed) (2012) Alternative Work Organizations (Basingstoke, Palgrave Macmillan). Erdal, D (2011) Beyond the Corporation: Humanity Working (London, The Bodley Head). Hadden, T, Ireland, P, Morgan, G, Parker, M, Pearson, G, Piccoto, S, Sikka, P and Willmott, H (writing as The Corporate Reform Collective) (2014) Fighting Corporate Abuse: Beyond Predatory Capitalism (London, Pluto). Mouffe, C (2013) Agonistics: Thinking the World Politically (London, Verso). Novkovic, S and Webb, T (eds) (2014) Co-operatives in a Post Growth Era (London, Zed Books). Parker, M, Cheney, G, Fournier, V and Land, C (2017) ‘Organizing is Politics Made Durable: Principles and Alternatives’ in A Spicer and G Baars (eds),

3 

See, Parker et al (2014), ch three for an exploration of these ideas.

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 381

The Corporation: A Critical Interdisciplinary Handbook (Cambridge, Cambridge University Press). Parker, M, Cheney, G, Fournier, V, and Land, C (eds) (2014) The Companion to Alternative Organization (London, Routledge). Parker, M, Fournier, V and Reedy, P (2007) The Dictionary of Alternatives: Utopianism and Organization (London, Zed Books). Parker, S and Parker, M (2017) ‘Antagonism, Accommodation and Agonism in Critical Management Studies: Alternative Organizations as Allies’ Human Relations. Spicer, A and Baars, G (eds) (2017) The Corporation: A Critical Interdisciplinary Handbook (Cambridge, Cambridge University Press). Unger, R (1998) Democracy Realized: The Progressive Alternative (London, Verso). Unger, R (2004) False Necessity: Anti-Neccessitarian Social Theory in the Service of Radical Democracy (London, Verso). www.premium-cola.de/. www.premium-cola.de/betriebssystem/wissenschaft and http://wiki.premiumcola.de/betriebssystem/untersuchungen.

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INDEX

accounting standards see under social purpose, unfitness of companies for Acker, J  168 activist-entrepreneurship see under new corporate movement Airbnb  198 Alchian, AA  50 ALTER-EU organisation  112–13 alternative theoretical angle see under new corporate movement AND 1 (company)  258 Anderson, A  324 Andre, K  163, 166 Anshan venture  281–2 anthroposophical movement see under Triodos Bank, case study AnyShare Society see under FairShares Model (FSM) Applebaum, Eileen  29–30 Arcadia (corporation)  117 Arla cooperative  278 Articles of Association, model  52 Ashley, Mike  254 Asus (company)  98 B Corps  199, 349 B Impact Assessment, biannual  261, 263 beginning/development of concept  258 benefit corporations  259, 263–4 certification requirements  259 challenges to model  261–3 corporate landscape in UK binary scenario  254, 255 changes to  263–4 charities as social enterprises  256 community benefit societies  255–6 cooperatives  256 corporate governance reviews  254 profit maximisation/shareholder value post-Big Bang  254–5 social enterprise/social benefit companies/ societies  255, 268 social investment growth  256 surplus distribution  257–8 corporate social responsibility  263 cross-pollination of corporate forms  264–5 features  258–61 future possibilities  265–7

as global movement  258 governance provisions not entrenched  262 key issues/conclusion  253, 267–8 legal form (Companies Act 2006, s 172)  260, 261, 262, 266 legal test/forms (UK)  260, 261, 262 proliferation of corporate forms  264 promotion/validation reasons for  261 shareholder value  262–3, 265 social economy, place in  264–5 test elements  259 voluntarily acquired status  258 Bailey, David  179 Bank of Credit and Commerce International  254 Barker, Mick  185 Batt, Rosemary  29–30 BEIS Committee  146 Benefit Corporation  271 Berle, Adolf  27–8, 35, 69–70 BHS corporation  117, 254 Big Society Capital  256 Bird, C  159 Birmingham Bike Foundry  303–4 Birmingham Children’s Hospital  161–2 Blair, Tony  145, 334–5 Blasi, Joseph  224 Blears, Hazel  335 Bligh v Brent  21 Boateng, Paul  335 Borland’s Trustee case  22–3 Boyd, Graham  317, 323 BP, Deep Horizon catastrophe  43, 153 Brexit  2–3, 111, 366 Brown, Gordon  335 Buchanan, Andrew  116 Business Roundtable, US  54 Cable, Vince  175 Cadbury, Sir Adrian, Cadbury Committee  254 Cameron, David  336, 344 Carbon Disclosure Project  96, 104 Carney, Mark  97–8 Cecosesola (Venezuela)  266 Chandler, Alfred  41 Charities (Protection and Social Investment) Act 2016  256 Cirkle (company)  101

384 

Index

ClientEarth  143 climate change accounting, stranded assets approach  97–8 actions taken  96 business responses  98–102 as shaper/climate change as shaper, distinction  104 uncertainties  96–8 capitalism transformation process  99–100 Carbon Disclosure Project  96, 104 circular economy  101 company rise/demise, causes  98 conclusions  105 consumption challenge  98–9 cradle-to-cradle manufacturing  101 current situation  102–4 denial, as business attitude  102 economic/business/political status quo  100 economic/consumption implications  95 energy/economic approaches to  97–8 fossil fuel issues  100–1 infinite production assumptions  96 international governance implications  95 modified business-as-usual approach  97 new business responses  101–2 postcapitalism theory  101–2 power, agency and legitimisation theories  103 prosperity without economic growth  100 PWC low carbon economy index  103 radical change argument  103 society-wide problem  104 substitution criteria  98–9 technological innovations  101 transformation challenge  105 2 degrees temperature rise  103–4, 105 uncertainties  95–6 unpopular views/actions  99–101 Climate Protection Award  153 Clinton, Hillary  108 Cobden Investments Ltd, Re  135 Coin Street Community Builders  335 community interest companies (CICs)  255, 261 advice and awareness  359–60 annual CIC report  348, 359 developing model  361 form introduced  337, 347 governance directors’ role  351 investors/funders  350 Regulator’s role  350–1 remuneration reporting requirements  352 stakeholder consultation  351–2 transparency requirement  352

investment  352–4 asset lock protection  353 companies limited by guarantee  353 grant funding  353 limited by shares option  353–4 sustainable business growth  352–5 key issues/conclusion  350, 360–1 numbers  349 other corporate options/legal forms  347–8, 349 public contracting legal structure of CICs  355 social value requirements  355, 357 spin-out model  355–6 structural barriers for social enterprises  354 public health/other public sectors  349 Regulator/regulations  348–9, 361 and social enterprise movement  360–1 social impact measurement  356–9 different traditions  357 methodology agreement difficulties  356–7, 358–9 social audit movement  357–8 social return on investment (SROI)  358 social purpose  348, 360–1 surplus distribution  257–8 Companies Act 1985  53 Companies Act 2006  53 section 541  118 Companies Act 2006, section 172  69 altered aspects of duty  135–6 B Corp legal form  260, 261, 262 breach of duty  137–8 compromise reformulation of duty  134 and corporate failures  131–2 corporate governance reform context  132 directors’ duties, proposed reformulation (TUC)  177 duty to act in interests of company, evolution  133–40 enforcement patterns  137 enlightened shareholder value (ESV) approach  133, 134–5, 141 factors for directors to take into account, list  135–6 hypothetical director test  138–9 interests of the company  136 key issues/conclusion  132–3, 146–7 reporting requirements  139–40 soft law impact  134, 144 stakeholders, relationship with, proposals for reform challenges to proposal  141–2 details  140–1 hard law limitations  134, 144 justification for proposal  143–6 post-Brexit necessity  144–6

Index scandals and necessity  144 signalling/enhancement of utility  143 success of the company  136 summary of duty imposed on director  131 unaltered aspects of duty  134–5 utility related issues  137 Companies (Joint-Stock) Acts 1844, 1856 and 1862  21, 51 compassionate organisation see under responsible corporate governance Cooper, SM  236 Cooperative Bank  196 co-operatives, marginalisation academic research trends  291–2 background  289 community research  290 co-operatives/cooperatives, research trends  293–5 definition  301 degeneration thesis  302–3 dual nature  302 funding for research  290–2 key issues/conclusion  289–90, 304–5 membership  301–2 methodology of research  292 sandpit events  290 social enterprises critique  300 definitions  297–8 downside  298–9 enterprise discourse  299–300 objectives  298 research trends  292–3 social enterprises/co-operatives contrast  304–5 research trends  295–7 social innovation  290–1, 303–4 unfamiliarity issues  291 values/principles  301–3 see also Denmark, cooperatives/foundations and corporate governance Corbett, Gerald  17 Corbyn, Jeremy  108, 336 Corporate Governance Commission, proposal  178 corporate landscape in UK see under B Corps corporate reform/economic diversity accountability  4–5 alternative business goals  7–8 alternative model  368–70 business forms, variety  5–7 contextual challenges  1–4, 8–10 cooperative solidarity  8 dysfunctional system  365–8 examples of organisations  377–8 future progress  371–3 political issues  376, 380 shareholder primacy  365–6, 367

 385

social organisation  379–80 variety of organisation  375–6 corporate social responsibility see under social purpose, unfitness of companies for corporate social irresponsibility, origins alternative business forms  32 company law/corporate law differences  18 cooperative movement  25 corporate schizophrenia  16–18 corporate shareholder ownership  31–2 critiques of shareholder value  33–4 de-personified conception  18 extended partnerships  20–1 financial oligarchy  25–6 financialisation and socialisation, as alternatives  24–6 financialised governance  28–30 incidents of ownership  16 institutional foundations  13 joint stock companies (JSCs)  18–20 legal hybridity of shares  33 limited liability  22 managerial revolution  28 nature of shares  21–3 owner or creditor, shareholder as  22–4 passiveness of shareholding  34–5 private equity firms  29–30 proprietary nature of shares  23 public partnerships  20–1 rentier investors/developed share market  21–2 shareholder primacy, reassertion  30–2, 35 socialised corporations  26–8 Weir case  14–15 corporate stakeholder accountability see under Triodos Bank, case study counter-movement (of Polanyi) see under new corporate movement Dacin, MT and PA  298 Daily Telegraph  153 Danfoss company  281–2 Danish Crown  278 Danish DLG  278 Davies Review (women on boards)  181 Deakin, S  111 Demsetz, H  50 Denmark, cooperatives/foundations and corporate governance absentee membership  278 centralised/multiple cooperatives  277–8 corporate governance Investor-State Dispute Settlement procedure  285–6 large scale organisation types (mid-19th cent)  272–3 post-financial crisis  272 shareholder concentration  272–3

386  shareholder model  284 situation in Denmark  274 template variety  271 US-UK corporate governance  271–2 craft workers  275–6 embedded owners/managers/ employees  277 further education grants  281 growth and development  277–83 industrial foundations effects  279–80 examples  280–1 innovation  279 model/scope  279 industrialisation process  274–7 local cooperatives  277 overseas engagement  281–3 proto-welfare state institutions  275, 285 railway towns  274–5 skilled workers  276–7 social context  284–5 summary/key points  283–6 technical schools  275, 276 tensions/problems  278 Desai, S  154 Dillard, J  247 directors’ duties see Companies Act 2006, section 172 Dobson, J  153 Dodd, Merrick  27–8 Dodge v Ford Motor Co  52 Dojo4Life Ltd see under FairShares Model (FSM) Doriean, Eric  319–20, 324 Durkheim, E  191 Easterbrook, Frank  30–1 economic democracy, facts about allocation of new wealth  220–2 business owners’ decisions  218–19 community effects  225–6 economic effects (John Lewis Partnership)  214–15, 222–7, 285 economic multiplier  223–4 empirical tests of theory  213–16 Employee Stock Ownership Plans (ESOPs)  213–14 employment sustaining  221–2 evolutionary theory  218, 226–7 human nature  226–7 information right  222 neoliberal paradigm, reasons for  217–19 ownership of assets  219–20 Panglossian hidden hand  217 participative management examples  213–16 productivity  224–5 representation right  222–3

Index share in the results, right to  223 summary  227 theoretical critique  216, 219 treatment of people  225 The Economist  42, 214 Ellerman, David  220–1 Employee Stock Ownership Plans(ESOPs) see under economic democracy, facts about Enron scandal  43, 153, 198 Erdal, David  200 evolutionary theory see under economic democracy, facts about FairShares Model (FSM), in US and UK agency-structure dynamics  327–8 AnyShare Society creative commons/intellectual property  320 dispute resolution clauses  320 ethical choices  324 IT industry culture  319 key requirements  318 legal/cultural context changes  318–19 reference value calculations  319 social object  318 variations of FSM rules  320–2 background  309 conflicts of interest  312–13 data collection/analysis, methodology  315–16 dis-embedding/re-embedding process  314 Dojo4Life Ltd cognitive framework development  317 dialectical fluidity  317 economic conditions  326 entrenched provisions  316–17 Founder members  317 history issues  325–6 holacracy  317 labour representation  318 multi-stakeholding  326 variations of FSM rules  320–2 weighted voting  317 influencing factors  315 internationalisation  314 key findings  316–22 key issues/conclusions  309–10, 327–8 membership of FSMs  313 methodology  315–16, 328 multi-stakeholder enterprises, arguments in favour  313 single-stakeholder enterprises into multi-stakeholder enterprises, transformation  311–12 social economy and FSM  311–15 social entrepreneurial agency, influence on structures  322–4, 328 social solidarity economy  312–13, 314–15

Index social structures, influence on human agency  324–6 structuration theory (Giddens)  309, 310, 328 Feinberg, J  164 Ferran, E  145 Financial Reporting Council (FRC)  178 Financial Times  43 First Group, worker board representation  184–5 Fischel, Daniel  30–1 Flannigan, Robert  21 Foucault, Michel  103 Foundation for Social Entrepreneurs  337 foundations see Denmark, cooperatives/ foundations and corporate governance Friedman, Milton  44, 47, 49, 50, 213 Froud, Julie  30 future progress, corporate reform/economic diversity  371–3 George, Jennifer  157 George, S  113 Giddens, A, structuration theory  309, 310, 323 Gilbert, J Coen  258, 264 Gilligan, Carol, In a Different Voice  155–6 Glasbeek, Harry  24 Google  219 Gower, LCB  23 Goyder, George  357 Grameen Foundation  196 Gray, R  234 Grayling, Chris  336, 338 Green Book policy guidelines  138 Green, Philip  117, 214, 254 Greenbury, Sir Richard  254 Grier, N  144 Gripple (business)  319 Hansmann, H  145 Hatfield (train) crash report  14 Haugh, H  298 Hayek, Friedrich  213 Heffernan, H  43 Heffernan, Margaret  253, 264, 267 Heracleous, L  52 Hewitt, Patricia  145, 335, 341 Hilferding, Rudolf  25 Hodge, Margaret  133 Houlahan, Bart  258 Hurd, Nick  336 ICT era  98 IFRS Interpretation Committee  116–17 Imola cooperatives  214 industrial foundations see under Denmark, cooperatives/foundations and corporate governance Intel (company)  98

 387

International Accounting Standard Board (IASB)  116 International Co-operative Values  266 Jack, S  324 Jacques, E  317, 323 Jameson, Rob  319 Jensen, Michael  50, 216, 219 John Lewis Partnership  214–15, 222–7, 285, 302, 368 see also economic democracy, facts about, economic effects Johnson, LPQ  67 Journal of Management Studies  299 Jowell, Tessa  336 Judt, T  41 Kassoy, Andrew  258 Katz reforms  111 Kay, John, review of equity markets  175, 254, 267 Kegan, R  317, 323 Keynes, JM  27, 55 Klein, N  99 Kodak (company)  98 Kondratiev, ND  42 Kraakman, R  145 Kruse, Donald  224 Lan, LL  52 Laske, O  317, 323 Laski, Harold  27 Latour, Bruno  247, 379 Lazonick, W  220, 221 Lehman Bros  198 Libor market scandal  13, 43 Liedtka, JM  163, 166 Lippmann, Walter  25–7 lobbying by corporations see under social purpose, unfitness of companies for Lukes, S  103 McDonnell, John  336 Madden, LT  158 Maersk  279–81 Marks and Spencer  214, 224 Marmot, MG  225 Marx, Karl  24–5 Maude, Francis  336, 344 Maxwell Group  254 May, Theresa  254 Mayer, Colin  33–4, 35 Means, GC  69–70 Meckling, William  50, 216, 219 Mid-Staffordshire Hospital Trust  160–1 Miliband, Ed  335 Miller, TL  157–8, 163 Millon, D  67

388 

Index

Mondragón Cooperative  165, 167, 196, 215–16, 266 Mouffe, C  247 neoclassical theory  48–9, 109–10 Neron, P-Y  164 new corporate movement activist-entrepreneurship  190, 199–201, 204 alternative governance/ownership models  192–3, 198–9 alternative theoretical angle  190–1 coherent terminology, lack of  193 collective associations  204 commons-orientated enterprises  197 cooperative enterprises  195–7 corporate power  191–2 corporate social responsibility (CSR)  197–8 counter-movement (of Polanyi)  190–1, 199–201 democratic tension  189 employee-owned/managed companies  198 false alternatives  197–8 global economic order  191 individual reasons for  199–200 key issues/conclusion  190, 204–5 legal form flexibility  202 mainstream media/discourse/policies  201 online platforms  198 peer-to-peer infrastructure  201 policies for social/cooperative entrepreneurship support  203 political constructs, markets as  191 public procurement  202–3 regulatory environment  201–4, 205 social enterprises  189–90, 194–5 transactional autonomy  189–90 Newbridge House (hospital)  161–2 nexus of contracts (NoC) theory see under separate legal entity (SLE) Novo Nordisk A/S  282–3 Nussbaum, MC  191 Oakeschott, Robert  216 O’Dwyer, B  247 Office for Civil Society  337–8 Olivetti (company)  98 Oström, E  313 Oticon A/S  159 Owen, DL  136 Pache, AC  163, 166 Panama Papers revelations  89, 266 Pennington, Robert  23 People and Planet case  137–8 Perez, C  102 Piatier, A  42 Pickett, Richard  266

planetary boundaries concept see under sustainable market actors, corporations as Polanyi, K  190–1, 199–201 Posting of Workers Directive  111 Premium Cola  377–8 public contracting see under community interest companies (CICs) Public Services (Social Value) Act 2012  202–3, 355, 357 Publix (retailer)  215 Purnell, James  335 Railtrack cases  14–16, 22, 31, 34 Reagan, Ronald  109, 213 responsible corporate governance agent diversity  159–60 alternative model  158–9 capitalist patriarchy  154–5 care plan approach  160–3, 165–6 care requirement  156 challenges/pitfalls  165–7 compassion concept  157–8 compassionate organisation  159–60 connection between responsible/irresponsible behaviour  152–3 consensus building  155–6 contractarian model  153 cooperatives  164–5, 166 corporate scandals  151–2 distributional inequalities  164 feminist care approach  158–9, 165–6 feminist theory  154–8, 167–8 hierarchies  153–4, 155, 163, 167 horizontal structures  164–5 key issues/conclusion  152, 167–8 legal/regulatory framework implications  163–5 models for governance  166 organisational principles  166–7 problematic structures  153 relational approach  156, 158–9 role interdependence  159 shareholders’ place  163–4 social enterprises  162–3 social interactions/communications  159–60 social justice feminism  156–7 spaghetti organisations  159, 166 stakeholder participation mechanisms  164 theory reinterpretation  155–6 structural features of care/compassion ethic  158–63 structural obstacles  152–4 system conditions  259–60 technology challenge  167 threats to planet  151 transformation  168

Index Ricardo, David  48 Ridley-Duff, Rory  196 Roberts, J  236 Rochdale Principles  266, 301–2 Royal Dutch Shell  143 Ruskin, John  55 SAAT (Stichting Administratiekantoor Aandelen Triodos Bank), supervisory board  238–9, 242–3, 246–7 Salomon case  31, 52, 118 Sanders, Bernie  108 Schor, J  198 Schumpeter, JA  42 Scott Trust  285 Senge, PM  236 separate legal entity (SLE) board of directors  66, 68 conceptual status  64–5 corporate constituencies  68, 71–2 corporate structure  65–7 directors’ duties  67–9 fiduciary duties  66, 67 key issues/summary/conclusions  62, 70–2 nexus of contracts (NoC) theory  61–2, 70 partnership model  63 pragmatism in concept  69 public limited liability corporation  62–4, 69–70 shareholder role  63–4, 67–8, 69, 71–2 social licence  69–70 shareholder primacy central role  173 company/shareholder interests, convergence  175 corporate governance and responsible investment team sizes  175 directors’ duties  174 reformulation of, TUC proposals  177–8 distribution of profits to shareholders  176–7 diversification and fragmentation issues  175 dysfunctionality  174 as economic ideology agency theory  50–1, 53 Anglo-America support  49, 54 background  41–2 belief system  47–9 corporate landscape  42–5 directors as agents  51, 52 evolution of business  45–6 false theoretical bases  49–51 financial dishonesty  42–4 financialisation route  46–7 key issues/conclusion  42, 55 legal agency relationship  51–5 mathematising relationships  48 mature phase  47 merger and acquisition (M&A)  46, 47

 389

neoclassical theory  48–9 organised money  44 overseas trading enterprises  51 principal-agent relationship  50 private ownership of company  49 privatisation  44 purpose of business  45 reversal of capital flow  50 small and medium sized enterprises (SMEs)  46 sustainability issues  41–2 technological innovation  42 transaction cost economics (TCE)  50 trickle down argument  48–9 see also sustainable market actors, corporations as individuals’ holdings  174 large listed companies  175 mergers and takeovers  176 overseas investors  174–5 pension funds/insurance companies’ holdings  174 as public policy  173 regulation’s role  173 share trading reliance  175–6 short-term shareholders, reduction of powers  178 Takeover Code reforms  176 UK investors  175 see also workers’ voice in corporate governance, case for Shareholder Rights Directive (EU)  82 Simpson, AV  166 Smith, Adam  48, 217 Social Enterprise Action Plan  337, 340 Social Enterprise UK  341, 342 social enterprises charities as  256 co-operatives see under co-operatives, marginalisation and community interest companies (CICs)  360–1 definitions  333–4 devolution effect  339 distance from policy levers  338 examples  334 grassroots movement  344–5 initiatives  340 mutuals agenda  336 new corporate movement  189–90, 194–5 New Labour Government  334–5 Office for Civil Society  337–8 policy  337–9 politics  334–6, 344 popular perception  340–1 practice  341–3 public services/welfare reform emphasis  335–6

390  responsible corporate governance  162–3 statistics  334, 342–3 summary  343–5 tensions within consensus  338–9 Third Way  334, 335 Work Integration Social Enterprise (WISE)  358 see also under co-operatives, marginalisation social impact measurement see under community interest companies (CICs) Social Investment Tax Relief  338 social purpose, unfitness of companies for accounting standards international  116–17 national  117 capitalism and inequality  107, 110, 112, 124–6 corporate self-regulation for social ends  123–4 corporate social responsibility  119–21 external interference  119 Global Compact on human rights  120 motivation  119 readymade Code  119–20 as shield from regulation  120–1 corporate veil  118–19 EU labour  111 global free trade  114 global workforce effect  108 government purpose, neoclassical notions  109–10 Green paper on Corporate Governance Reform  122–3 intermediate reforms  121–4 ISDS clauses  114–15 key issues/conclusion  109, 124–6 labour protection  110–11 less regulated business forms  118–19 lobbying by corporations  112–14 reform proposition  121–2 market and inequality  110 neoliberalism  109–12 political establishment’s success  108 political order, reaction against  107–8 posted workers protection  111 public company re-registered as private company  122–3 re-embedding of social policies  107 regulators and corporations  116–17 rule-shaping by corporations  114–15 shareholder/company property, public/ private separation  118–19 Transparency Register (EU)  113 US lobbying  113–14 Social Value Act 2012  202–3, 355, 357 Southern Counties Fresh Foods Ltd, Re  135 Sports Direct  111, 254

Index stakeholder groups/discussions see under Triodos Bank, case study stakeholders, relationship with see under Companies Act 2006, section 172 Stiglitz, Joe  217 Stout, Lynn  33, 35 on B Corp model  261–2, 267 structuration theory (Giddens) see under FairShares Model (FSM) Sustainable Companies Project  82–3 sustainable market actors, corporations as board duties  85–6 business and finance initiatives  82 challenges/goal, acknowledgement  83–4 core company law, comparative analysis  79–80 definitions  77–8 ecological limits, EU recognition  84 environmental externalities  79, 80 EU directive  82 general meeting duties  87 key issues/conclusion  78, 88–9 key performance indicators (KPIs)  86–7 legal and social norms, interaction  80–1 life-cycle focus  87 management remuneration incentives  80 need for reform  83 non-financial/CSR reporting  82–3 planetary boundaries concept  83–5 political feasibility  88 reform proposals  83–8 regulatory ecology  89 shareholder value primacy  79–82 short-termism  81–2, 89 social externalities  79 sustainability language/unsustainable paths  88–9 sustainable business plans  86–8 sustainable value concept  85 unsustainability factors  79–83 see also shareholder primacy as economic ideology Sustainable Market Actors for Responsible Trade (SMART) project  78, 89 Tawney, RH  27 Teasdale, S  297 Tello, E  235 TESCO Supermarkets  143 Texas City Refinery explosion  43 Thatcher, Margaret  109–10, 213 30 per cent club  181 Tinder Foundation  264–5 Touraine, Alain  191 Trans-Pacific Partnership (TPP)  108, 115

Index Transatlantic Business Dialogue  115 Transatlantic Trade and Investment Partnership (TTIP)   108, 115, 285 transparency see under Triodos Bank, case study Triodos Bank, case study annual reports (2008–15)  239 anthroposophical movement  237–8 as Certified B Corporation  233–4 corporate stakeholder accountability communicative action  236 contrary concept  237 ethical concerns  236 hierarchical power  236–7 information provision  235 instructions from accountees  235 power differentials  235–7 relationships requiring, narrow/ broad  234–5 discussion  245–7 key issues/conclusion  234, 237, 247 nature of bank  237–9 research methods  237–40 SAAT, supervisory board  238–9, 242–3, 246–7 shareholder power  246–7 stakeholder groups/discussions  239, 240–3, 246, 247 co-workers  241–3 depository receipt holders  239, 241, 246 mission/values support  243, 244, 246 purpose of discussion  240–1 suppliers/customers  241 supervisory board (SAAT)  238–9, 242–3, 246–7 sustainability reporting  233 transparency  243–6 GRI (Global Reporting Initiative) guidelines  235, 244 loan customer information  244–5 managerial control  244 remuneration/rewards  245 two-stage approach  240 uniqueness  238 unlisted shares  238–9 Tronto, JC  166 Trump, Donald  102, 108, 285, 366 TUC’s Fund Manager Voting Survey  175

 391

Uber  198 Unerman, J  247 Unger, Roberto  379–80 Unilever  99 US General Accounting Office (GAO)   213–14, 216 Veblen, Thorstein  26 Vinnari, E  247 Wal-Mart  99 Warren, Edward  17–18, 21 Washington, lobbying in  113–14 Watson v Spratley  21 West Coast Capital, Re  135 Wheeler, S  160 White, J  153 Wicks, AC  155 Wilkinson, Kate  266 Williamson, Oliver  50 Winters, Jeffrey  32 Wolf, Martin  33 women on boards  181–2 Wordsworth, Charles  18, 20 Work Integration Social Enterprise (WISE)  358 workers’ voice in corporate governance, case for board diversity, benefits/importance  181–2 collective consultation/bargaining rights  185–6 democratic principle  180 economic/social benefits  183–4 in-depth knowledge  181 investment/interest of workers  179 other board members’ views  183 positive employment relationships  179–80 proposals by TUC  180–1 sustainable company success, interest in  181 two-tier or supervisory board systems  184 UK examples  184–5 see also shareholder primacy World Trade Organization (WTO)   114 WorldCom  198 Wright, M  298, 299 Zahra, SA  298, 299, 314 Zeiss (business)  214

392