Company Law and the Myth of Shareholder Ownership

Published date01 January 1999
Date01 January 1999
Company Law and the Myth of Shareholder Ownership
Paddy Ireland*
In recent years, the rather arcane subject of corporate governance, meaning the
governance of the public companies that dominate the economy,1has risen high on
the political and legal agenda. Various reasons for this can be identified, prominent
amongst them the debates, with which the governance issue has become entwined,
about the virtues in relation to both social welfare and international
competitiveness of different versions of capitalism and the corporation. As
company lawyers are well aware, diverse opinions have emerged, with some
advocating the adoption of a legal model of the company based around so-called
stakeholding principles akin to those said to be found in Germany and Japan, while
others seek to reinvigorate the traditional, shareholder-oriented, Anglo-American
model.2Despite these differences, however, there is widespread agreement that
shareholders have an important role to play in ensuring good governance. For
some, good governance requires a restoration of shareholder supervision and
control.3For others, including many supporters of ‘stakeholding’, it should not be
judged purely in terms of maximising ‘shareholder value’ but still requires more
‘committed’ ownership by shareholders, if only to eradicate the danger of ‘short-
termism’.4In keeping with this, the Labour government has recently asserted the
need for more active and less fickle shareholding and has for some time been
toying with the idea of making voting at company general meetings compulsory for
institutional investors.5
Underlying this consensus is a shared assumption: that the shareholders of large
corporations ‘own’ the companies concerned;6or in the ‘nexus of contracts’ or
‘agency’ theory of the company, in what amounts to the same thing, that the
The Modern Law Review Limited 1999 (MLR 62:1, January). Published by Blackwell Publishers,
108 Cowley Road, Oxford OX4 1JF and 350 Main Street, Malden, MA 02148, USA.
*Law School, University of Kent.
1 This article uses the terms ‘corporation’ and ‘corporate’ to refer to large public companies, and
‘corporate governance’ to refer to the general control and accountability of corporate executives
rather than to issues of day-to-day management. Concern with corporate governance is a largely
Anglo-American phenomenon.
2 Compare, for example, John Parkinson, ‘Company Law and Stakeholder Governance’ and David
Willetts, ‘The Poverty of Stakeholding’ in Gavin Kelly et al (eds) Stakeholder Capitalism (London:
Macmillan, 1997).
3 ‘[E]ffective, internationally competitive corporate governance requires the efficient discharge of the
ownership role’, Allen Sykes, ‘Proposals for Internationally Competitive Corporate Governance in
Britain and America’ (1994) 2 Corporate Governance: An International Review 187, 194.
4 See, for example, Will Hutton, The State We’re In (London: Jonathan Cape, 1995).
5 See Margaret Beckett (President of the Board of Trade), speech to PIRC, 4 March 1998.
6 Company lawyers, while generally skirting this issue, sometimes acknowledge that shareholders are
not ‘owners’ of the company in the usual sense of the word. They tend to assume, however, that they
have a proprietorial interest in the company akin to ownership, hence, for example, the widespread
references to ‘the separation of ownership and control’. Non-lawyers tend to be less hesitant. In the
Financial Times (27 April 1998), for example, it was recently suggested that the idea that
shareholders own corporations was ‘the most basic tenet of the Anglo-Saxon view of capitalism’.
Confirming this, a City correspondent commenting recently on the behaviour of the directors of
Lonhro, suggested that they had ‘forgotten . .. [the] principle of company law . .. that shareholders
own the firm and directors merely run it’ (her emphasis) The Guardian, 18 April 1998.
shareholders own not ‘the company’ but ‘the capital’, the company itself having
been spirited out of existence.7It is a natural corollary of this assumption that the
interests of shareholders should take priority, if not complete precedence, over all
others; and that shareholders should, as of right, have a substantial, if not an
exclusive, say in the running of companies. As a result, stakeholders and others
seeking significant governance reform are, in effect, placed in the position of
asking shareholders to give up some of their ownership rights, or of trying to
persuade them to exercise them in particular (‘socially responsible’) ways, either
by arguing that it will be in their own best long-term interests to do so, or by
appealing to their altruism.
However, despite the general acceptance of the ‘ownership’ assumption, the
legal nature of the share and shareholding are surrounded by uncertainty. As
L.C.B. Gower says, the share does not readily fit into any ‘normal legal category’.8
Company lawyers are clear what a share is not – apart from when a company is
wound up, a rare occurrence in the case of a public company, it is not an interest in
the corporate assets.9But they are much less clear what it actually is. The question
‘what . . . is the exact juridical nature of the share’, Gower observes, ‘is . .. more
easily asked than answered’. It is, perhaps, for this reason that ‘a definition of
shares . .. is something which text books have rarely attempted’,10 though given the
importance in the modern world of the share as a form of property and its position
at the heart of company law, mediating the relationship between companies and
their shareholders, this is rather curious. Moreover, as many have pointed out, it is
in many ways equally difficult satisfactorily to distinguish shareholders from
debenture holders. In ‘legal theory’ they are ‘rigidly separated’, but ‘in economic
reality [they] merge into each other, . . . [a] close examination of the rights
conferred by [them] show[ing] the impossibility of preserving any hard and fast
distinction between them which bears any relation to practical reality’.11 Rarely are
these problems explored in any depth, however, one of the unfortunate effects of
the relatively uncritical acceptance of the ‘ownership’ assumption having been to
foreshorten, and substitute for, analysis. This article seeks to lift the carpet of
‘ownership’ under which they have been swept and, in so doing, hopes to shed
light on some of the conceptual and theoretical conundrums that beset modern
company law and to clarify some of the issues underlying the governance debate.
7 In a company law equivalent of Mrs Thatcher’s ‘there is no such thing as society. ..’, supporters of the
‘nexus of contracts’ theory argue that there is no such thing as the company only the contractual
arrangements between the individual actors involved in the firm. As I later explain, this circumvents
rather than resolves the corporate ownership problem. For an exposition of the contractual theory of
the corporation, see F. Easterbrook and D. Fischel, The Economic Structure of Corporate Law
(Cambridge Mass: Harvard UP, 1991) ch 1, and for an application of these ideas to British company
law, see Brian Cheffins, Company Law: Theory, Structure and Operation (Oxford: Clarendon Press,
1997). For a critique arguing that ‘the company’ as constituted by these theories is composed not of a
nexus of contracts but a miasmic nexus of metaphors, see David Campbell, ‘The Role of Monitoring
and Morality in Company Law: A Criticism of the Direction of Present Regulation’ (1997) 7
Australian Journal of Corporate Law 343.
8 Paul Davies, Gower’s Principles of Modern Company Law (London: Sweet & Maxwell, 6th ed 1997)
299, 321. The most recent edition of Gower was produced by Paul Davies, but the sections referred to
in this article are largely unchanged from earlier editions and I will, therefore, attribute the views
expressed to Gower rather than to Davies.
9Short Bros vTreasury Commissioners [1948] 1 KB 116.
10 (1989) 10 Company Lawyer 140.
11 Gower, n 8 above, 301. Paradoxically, this ‘economic reality’, recognition of which ostensibly
weakens the claims of the corporate shareholder, finds some expression in ‘nexus of contracts’
theories of the company which seek to assert the ultimate supremacy of the shareholder interest.
January 1999] The Myth of Shareholder Ownership
The Modern Law Review Limited 1999 33

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