Shareholder Primacy, Labour and the Historic Ambivalence of UK Company Law

Most directors and senior managers of British companies would likely regard it as trite law that, in undertaking their functions, they are accountable first and foremost to their employer firm’s general body of shareholders. It follows that the interests of other corporate constituencies – and, in particular, those of employees – must ultimately cede to those of shareholders in the event of conflict. Although frequently taken for granted today, the lexical priority that the British company law framework affords to the interests of shareholders is remarkable, not least when viewed alongside the correspondingly disempowered corporate governance status of labour in the UK.

On first reflection, it is somewhat curious that the interests of employees have not figured more prominently within British company law, especially when one considers the general political disposition of the country in modern times. Throughout the course of the last century, the UK has witnessed 37 years of Labour government (or 42 years if one includes Labour’s participation in the wartime coalition government). And although the UK is acknowledged on the whole as having a more neo-liberal (ie right-wing) political orientation than many of its northern European counterparts, it nonetheless has a comparatively strong social-democratic (ie left-wing) political tradition in relation to other English-speaking and former-Commonwealth countries, at least since the Second World War. It is thus not unreasonable to expect that, at some point during the post-war era, democratic public policy measures might have been taken to effect the direct integration of worker interests into the heart of the British corporate legal structure.

The apparent persistence of shareholder primacy in the UK throughout modern times is made even more striking by the fact that numerous other major European company/corporate law systems have traditionally vested employees with a formal share of corporate decision-making power at board level, most of which continue to do so today. This demonstrates that, contrary to what some Anglo-American commentators have previously averred, purely shareholder-oriented models of company/corporate law are, from an international standpoint, neither functionally inevitable, nor innately superior to the available alternatives. Furthermore, it is not readily apparent from the UK’s historic industrial performance that the country’s shareholder-centric corporate governance paradigm has been conducive to any material comparative advantage over more labour-oriented ‘competitor’ systems. Nor would it seem that the characteristics of Britain’s key industrial sectors are sufficiently distinct from those of her continental-European counterparts to justify the adoption of such a markedly differing national company law regime, at least absent other operating causes.

However, whilst the centrality of shareholders’ interests to the doctrinal and normative fabric of contemporary UK company law is both manifest and incontrovertible, this has curiously not always been the case. With respect to the fundamental question of the proper corporate objective (that is, as to whose interest British company directors are expected to serve while carrying out their functions), UK company law up until 2006 adopted a highly ambiguous position. Moreover, British company law has in the fairly recent past come precariously close to adopting a radically different board representation model, in which worker interests would formally have shared centre-stage with those of shareholders in a similar vein to the traditional German corporate governance model.

In my forthcoming book chapter I argue that, whilst UK company law might look substantively stable and well-settled on its surface today, on closer inspection this façade of apparent calm can be seen to mask a fairly recent history of doctrinal and ideological turbulence with regard to fundamental underlying concerns. There is thus cause to question whether the basic normative impetus of the UK’s company law framework is as complementary to its surrounding economic and socio-political context as might first appear. Relatedly, one might justifiably query the long-term sustainability of the shareholder primacy position within British company law, particularly in the light of contemporary demographic trends which suggest a developing deficit of popular public support for preserving the UK’s traditionally shareholder-centric corporate governance paradigm.

Marc T. Moore is Reader in Corporate Law at the University of Cambridge