Faculty of law blogs / UNIVERSITY OF OXFORD

The Government Controlling Shareholder as a Fiduciary: Implications for Climate Change Management and Litigation


Ernest Lim
Professor at the Faculty of Law, National University of Singapore


Time to read

4 Minutes

State-owned enterprises (SOEs) have substantial economic and social impact on societies and economies. They are often the cause of and the solution to the climate crisis. As the controlling shareholder of SOEs, the government wields significant legal and economic powers over them. There is a reasonable expectation that the government shareholder, which is the second largest type of shareholder after institutional investors, should act in the exclusive interests of the members of the polity and not for its own partisan ends. However, although the government controller can and has abused its powers and engaged in conflicts of interest, it is not subject to any specific constraints or duties under corporate law. This major neglect is explicable on the basis that corporate law and governance have focused mainly on two types of agency problems (the principal-agent problem and the oppression of minorities by the majority), neither of which is particularly suited to the context of the government shareholder.

Further, if we are serious about holding SOEs accountable for their roles in climate change and for other negative externalities, we cannot merely treat SOEs as ordinary companies and apply existing or proposed rules that govern companies to SOEs. We need to think about holding the controlling shareholder of SOEs, namely, the government, accountable, not only through public law but also private law mechanisms. For example, imposing due diligence obligations on companies (which include SOEs) and requiring directors to consider the consequences of their decisions for sustainability matters, while necessary, are insufficient. We need to develop a theory and a mechanism for holding the government controlling shareholder accountable.

My forthcoming paper based on the keynote lecture delivered at the University College London (UCL)—European Corporate Governance Institute (ECGI) Biennial Law and Ethics Symposium advances a new theory of fiduciary government controlling shareholders that can provide a theoretical and legal basis to evaluate the conduct of the government controller and that can form the basis of a cause of action against it. I argue that the ultimate controlling shareholder of SOEs – the government – should owe fiduciary duties to act in good faith in the public interest and to avoid unauthorised conflicts of interest. I further argue that the direct controlling shareholder of SOEs — the government agency or the company that the government interposes between itself and the SOEs — should owe both first order fiduciary duties to the government (the ultimate controller) and second order fiduciary duties (which include acting in good faith in the public interest).

My theory poses a challenge to the prevailing orthodoxies in the US, UK and Commonwealth corporate law and governance. For US corporate law, where the government is the controlling shareholder, my view is that it should owe fiduciary duties to act in the public interest. For UK and Commonwealth corporate law, my theory calls into question the principles that only directors should be regarded as fiduciaries, and that shareholders can generally vote as they please even if doing so is antithetical to the company’s interest.

Why and how fiduciary duties can be imposed

To make these arguments, I begin by evaluating the theoretical arguments in favour of characterising the government as a fiduciary given that understanding, justifying and critiquing the government in fiduciary terms has a long history in political theory.  I argue that an equally strong case can be made for the government controlling shareholder of SOEs to be treated as a fiduciary given the limited constraints on the exercise of its significant and substantial voting rights, its abuse of powers, as well as conflicts of interest. Subsequently, I examine the important issue of to whom the government controlling shareholder should owe fiduciary duties with reference to two types of SOE structures, the first of which is that the government is the controlling shareholder of the SOE, and the second is that the government interposes a wholly controlled entity between itself and the SOE. I also consider how the duties can be enforced.

Potential objections

I also address potential objections to my analysis. One objection is that the fiduciary duty to act in the public interest exposes the government shareholder to multiple principals or beneficiaries with divergent interests. I show that this objection inaccurately assumes that there is or ought to be only one or one class of beneficiary (or principal), and within that class, there is a common goal or interest. Another objection is that subjecting the government controller to fiduciary duties is redundant because under administrative law, the government’s exercise of its discretionary powers is already constrained by the requirements to include relevant considerations and exclude irrelevant ones and for the government to act for proper purposes. I show that this objection rests on the questionable assumption that the government controlling shareholder will necessarily be subject to judicial review. The other objection is that corporate mechanisms such as derivative action and unfair prejudice (or oppression) are sufficient to hold the government accountable. However, these mechanisms are intended to remedy harms done to the company and shareholders, and not to the public. I also argue that these corporate mechanisms do not address the problem of conflicts of interest by the government shareholder.

Implications for climate change management and litigation

Finally, I explore the implications of my arguments for climate change management and litigation. I show that the ultimate and direct government controlling shareholders may breach their fiduciary duties if they fail to address climate-related risks as part of their investment approaches, governance structures, monitoring actions, engagement practices and management of conflicts of interest. I then explain the benefits of having a breach of fiduciary duties as a possible cause of action in climate change litigation, the most important of which is that it may be easier for the causation requirement to be satisfied.

Broader implications for corporate law, fiduciary law and private law

The arguments in this article may have significant ramifications for corporate law, fiduciary law and private law. On corporate law, I demonstrate that it needs to address the neglected issue of holding the government controlling shareholder accountable and a key mechanism of doing so is by subjecting it to fiduciary duties. On fiduciary law, I show that it can illuminate the administration of an important social and economic institution, ie the SOE – which has been overlooked in the fiduciary law literature – by using climate change management and litigation as an illustration. On private law, this article invites us to consider whether fiduciary duties can and should be used to control the exercise of discretionary powers in the public realm, specifically the governmental exercise of social and economic powers through SOEs. After all, despite the differences in the structure, nature and scope of public and private law, there are sufficiently material similarities that have led courts in other contexts to use public law principles to regulate private business relationships. It is thus apposite to consider whether corporate fiduciary law should be used to regulate the governmental shareholder.


The author’s complete article can be accessed here.

Ernest Lim is Professor of Law at the National University of Singapore.


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