Board Accountability and The Entity Maximisation and Sustainability Approach
Accountability operates expressly and implicitly in the field of corporate governance to the point where it is regarded as one of its most critical elements. The accountability of the board of directors is an important part of the accountability component of corporate governance and it has been said that good corporate governance is able to be best achieved by holding directors accountable for their behaviour and decisions.
My recent paper, available here, examines how board accountability would work where an entity maximisation and sustainability approach to the company is taken. In essence this approach, adopting entity theory, takes the view that the ultimate objective of the company should be that the overall long-run market value of the company as a whole is increased, taking into account the investment made by various people and groups, and that the company will be managed with its long-term survival in mind. Given this context, the paper analyses the question of to whom the board is accountable in companies with one-tier boards. It takes the view that the board is to be accountable to the company and it is argued that this means the company entity.
The paper rejects the idea that the board can be accountable to itself in its role of acting on behalf of the company, as there needs to be some independent person or body that fulfils the role of accountee (the one to whom the board is accountable). It then suggests two possible ways of making boards accountable to the company. First, the board is accountable to an accounting council that is established solely to act as a body to whom the board is accountable, and it is granted certain powers such as the removal of directors and the right to require at any time a report from the board on the affairs of the company. The council could consist of an equal number of representatives of the shareholders and the employees in a similar manner to the supervisory boards of larger German companies. The second alternative is to have the general meeting as the body to which the board is accountable.
Both alternatives have their attractions. The use of an accounting council is appealing in that it takes direct accountability away from the shareholders, and this is likely to sit well with non-shareholder stakeholders and the public, and it provides for greater inclusion in corporate governance. But it is likely to encounter stiff opposition in many jurisdictions, particularly if employee representatives sit on the council. Accountability of the board to the general meeting also has its appeal. However, it is probably only going to work if the shareholders are, when they form as the general meeting, subject to a fiduciary duty to act in the best interests of the company rather to vote as they please, in order to ensure that the shareholders do not act opportunistically and against the company’s interests.
Andrew Keay is Professor of Corporate and Commercial Law at the University of Leeds.
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