INTRODUCTION
Much domestic corporate legislation is largely underpinned by the shareholder primacy theory, a corporate law ideology focused on creating a conducive environment for corporate executives to maximize profits for shareholders with few requirements for safeguarding other rights. Nevertheless, companies are urged to satisfy the interest of persons other than the shareholders. These other persons usually affect, or are affected by, the achievement of a company's purpose, or have a legitimate claim on a company and can exert influence over it, or are exposed to risk whether financial, human or environmental as a result of the company's operations.Footnote 1 These other persons or entities are the corporate stakeholders.Footnote 2
Corporate governance is the “relationship among various participants in determining the direction and performance of corporations”.Footnote 3 It is also defined as the various means through which society seeks to control company behaviour in the public interest.Footnote 4 The Organisation for Economic Cooperation and Development (OECD) defined corporate governance as a set of relationships between a company's management, its board, its shareholders and other stakeholders.Footnote 5
Corporate social responsibility (CSR) arises in corporate governance discourse when stakeholder protection is discussed. CSR appears to be that link between corporate governance and stakeholder protection. While CSRFootnote 6 may also be bedevilled by different definitions and conceptions, this article conceptualizes CSR as a regulatory construct by which the interests of corporate executives and directors are aligned with not just the interests of shareholders but also those of a stakeholder group within the company's environment. This company environment includes the company's physical environment (its surrounding land, air and water, together with its host and any impacted communities within its area of operation), its human environment (such as its members and employees), its social environment (its interaction and reputation in society), its economic environment (managing wealth and resources creation and distribution) and political environment (interaction with government and regulatory bodies).
Although CSR is the missing link between corporate governance and stakeholder protection, stakeholder theory and CSR are not exactly the same thing and do not seek to achieve the same goal. As demonstrated below, while CSR is a neutral concept and may not necessarily be contrary to the shareholder primacy theory, stakeholder theory sits on the opposing side of the fundamental assumptions of the shareholder primacy model, especially in stakeholder protection discourse.
The role of CSR and corporate governance in the stakeholder protection discourse must be underscored within the corporate law context. Since it is practically impossible for legislators to envisage or anticipate every mischievous scenario in corporate law and practice, it is virtually impossible for primary legislation to envisage and provide for every possible problem or challenge in corporate law and practice. This means that there will exist certain lacunae to be filled by judicial interpretation and agreed standards, regulations, conventions and best practice codes, which may not have passed through legislative processes. The principles of both CSR and corporate governance (as presently expressed largely in voluntary self-regulatory codes) are thus essentially applicable to fill in these gaps. In addressing stakeholder protection, the principles of corporate governance and CSR are useful tools employed in giving effect to legislative provisions, especially in the absence of case law.Footnote 7 This also means that corporate governance and CSR principles should, and will, follow and align with legal provisions. In other words, legislated rules of corporate law should not be at variance with the principles of corporate governance, and vice versa. The OECD Principles of Corporate Governance underscore this point noting that, while the corporate governance framework should promote transparent and fair markets, and the efficient allocation of resources, it should also be consistent with the rule of law and support effective supervision and enforcement.Footnote 8 Both primary and secondary legislation usually provide for stakeholder protection by enjoining corporate executives to seek profits for shareholders sustainably, by having regard for the impact of corporate actions on the business's other constituents.Footnote 9 Giving effect to legislative corporate law provisions (especially regarding stakeholder management and protection) has led to a proliferation of largely voluntary corporate governance codes of best practice around the world.Footnote 10 These codes contain self-regulatory corporate disclosure requirements, enjoining integrated corporate reporting on so-called non-financial (social and environmental) or sustainability matters.
Further to the comment at the beginning of this introduction, although two dominant corporate objective theories (the shareholder primacy and stakeholder-oriented theories) have largely shaped corporate governance and disclosure requirements, and while many requirements appear underpinned by the stakeholder theory, upon critical scrutiny they are essentially conditioned by the fundamental assumptions of the shareholder primacy theory.Footnote 11 Shareholder primacy oriented disclosures may be direct or indirect. They are direct if the target benefit is the provision of relevant information to shareholders or towards enhancing shareholder value, or allowing prospective shareholders to decide whether or not to invest in the company. They could be indirectly for the shareholders’ benefit when the disclosure regime appears on the surface to accommodate stakeholder engagement, but ultimately enhances the interests of shareholders (both present and prospective). Usually when they are indirect, all activities or major decisions resulting from such stakeholder engagement are subjected to shareholder approval or implementation with little or no further recourse to the stakeholders involved. This article shows how prevalent this indirect shareholder primacy oriented corporate disclosure has been.
The second form of corporate disclosure benefits the larger stakeholder group. This kind of disclosure usually reflects a genuine demonstration of steps undertaken by a company to address its own irresponsible corporate behaviour towards stakeholders. This second disclosure requirement has two targets: raising a company's cost of irresponsible corporate behaviour, as stakeholders are expected to shun such a company upon accessing negative disclosures without credible mitigating procedures; and incentivizing responsible corporate behaviour, the disclosure costs of which ultimately reduce upon the positive reaction of relevant stakeholders to the information disclosed.Footnote 12 This theoretical distinction in corporate disclosure requirements is vital, because the purpose of the disclosure usually determines the extent and quality of the disclosure and therefore its efficacy.Footnote 13 If a disclosure targets shareholder interests and aims to enhance shareholder value, then the level or extent of information to be disclosed by the companies is likely to be minimal, sufficient to comply with minimum legal requirements, without necessarily paying attention to the adequacy, accuracy or otherwise of stakeholder information disclosed in the wider public interest.Footnote 14
In light of the foregoing, this article is interested in the following questions. What theoretical models underpin corporate disclosures towards stakeholder protection in Nigeria and South Africa? In what primary corporate law provisions are stakeholder protection measures expressed? In other words, to which stakeholder protection provisions in legislated primary company laws in Nigeria and South Africa are corporate governance codes giving effect? How effective are these provisions within the business community in these countries? What additional mechanism or alternative approach may be employed to tackle victimization of legitimate and qualified stakeholders and curb box-ticking, and empty, mindless compliance with corporate disclosure requirements in corporate governance codes?
This article argues that answers to these questions in relation to safeguarding stakeholder rights through responsible corporate behaviour transcend compliance with disclosure requirements in corporate governance codes. It also argues that corporate law isolation from the provision of effective stakeholder protection in Nigeria and South Africa is untenable. Following this introduction, the article considers corporate law theories and principles shaping stakeholder protection requirements and their usefulness to stakeholders. It then comparatively analyses corporate law and the CSR legal and regulatory framework aimed at protecting stakeholder rights in South Africa and Nigeria, and highlights factors undermining effective stakeholder protection in their corporate governance and CSR discourse. It recommends additional measures and an alternative approach for stakeholder protection in these states. A conclusion follows.
STAKEHOLDER PROTECTION AND UNDERLYING THEORIES
Theories are constructed principles, guidelines and assumptions aiding deeper interpretation of concepts, ideas, actions and inactions. A theory is a group of logically organized and deductively related lawsFootnote 15 that are constructed to make sense of the judgments that constitute the ethical and political worlds of humans.Footnote 16
Sometimes, corporate law theories appear as “interesting philosophical speculations” or “intellectual games”, or are deemed “metaphysical” or just bluntly called a “useless waste of time”.Footnote 17 In reality however, they aid the development of a framework within which we can assess the values and assumptions that either unite or divide the plethora of cases, reform proposals, legislative amendments and practices that constitute modern corporate law.Footnote 18 Accordingly, as shown below, expounding the fundamental assumptions behind certain theories underpinning stakeholder protection discourse is vital to the findings and recommendations offered in this article. Given the multidisciplinary nature of the CSR and stakeholder protection discourse, there are different theoretical approaches from which stakeholder protection may be, and has been, analysed.Footnote 19 However, for the purpose of this article, the two dominant corporate law theories (shareholder primacy and stakeholder) are outlined below.Footnote 20
Shareholder primacy theory
To a shareholder primacy theorist, all directors’ duties must be driven to maximize shareholder wealth and value.Footnote 21 The theory proceeds on a fundamental assumption that companies and businesses are the private propertyFootnote 22 of their incorporators and as such the success of the company must be taken as the success of its members. Milton Friedman noted that, “few trends could so thoroughly undermine the very foundation of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible”Footnote 23 and that “there is one and only one social responsibility of business - to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say engages in open and free competition, without deception or fraud”.Footnote 24 Corroborating Friedman, Hayek also argued against the use of corporate property and resources “for specific ends other than those of a long-run maximization of the return on the capital placed under [the company's] control” and further warned that the fashionable doctrine that a company's policy should be guided by “social consideration” was likely to produce most undesirable results.Footnote 25
The good news from this is that this theory absorbs directors from undue distractions and external pressures,Footnote 26 especially where CSR and stakeholder management are considered in that manner. The bad news, however, is that this model will not only undermine effective stakeholder protection mechanisms but that it has so dominated corporate law and governance around the worldFootnote 27 (especially in Anglo-American jurisdictions)Footnote 28 that its 21st century proponents argue it should signal the end of corporate law debates on corporate objectives.Footnote 29 For instance in the United Kingdom (UK), conscious effortsFootnote 30 were made to promote a seeming third way theory between the shareholder primacy and stakeholder-oriented theories, called “enlightened shareholder value”Footnote 31 (ESV), where extraneous competing interests of certain stakeholders are supposedly balanced, but only for the long-term benefits of the shareholders (ie the maximization of dividends and capital, or share price, growth).Footnote 32 However, ESV is still rooted in the shareholder primacy model, having not given the stakeholders any real justiciable rights.Footnote 33 Applying the fundamental assumptions of this theory therefore, many cases have held that it will largely constitute an unacceptable corporate waste of time and resources for corporate executives and directors to sacrifice profits, which would otherwise be available to shareholders, on the altar of some grandiose ethical, social or environmental concerns of a stakeholder group.Footnote 34 In relation to policy choices, this theory influences arguments that corporate law should focus on providing an enabling environment for businesses to thrive (and maximize profits), while issues relating to corporate responsibility or stakeholder protection against abuses using the corporate form should be resolved within other branches of the law, such as environmental law, human rights law etc.
Stakeholder theory
Edward Freeman made the stakeholder model popular and defined the term “stakeholder” as the “groups and individuals who benefit from or are harmed by, and whose rights are violated or respected by, corporate actions”.Footnote 35 The stakeholder theory is based on the assumption that companies ought to exist for the mutual benefit of those with relevant interests in or against the companies as a going concern.Footnote 36 While the shareholder primacy model is prevalent in Anglo-Saxon jurisdictions, the stakeholder oriented theories have been mostly adopted in East Asia, and continental Europe, in particular The Netherlands and Germany.Footnote 37 As may be expected, these stakeholder theories afford some protection for stakeholders. They inform agitation that corporate decisions, actions and inactions must demonstrate due consideration of multiple stakeholder interests, including shareholder interests. Therefore, within the ambit of this model, no singular interest of any stakeholder is particularly ranked higher than any other.Footnote 38 All such interests from different constituents must be balanced in determining the success of the business.Footnote 39 The fundamental assumptions behind these stakeholder theories have also been widely adopted in modern legal principles,Footnote 40 (business) codes of corporate governance,Footnote 41 court judgmentsFootnote 42 and legislationFootnote 43 around the world. Further, with the adoption of ESV in the UK, its corporate governance has been described as being in a “state of flux”, rather than being really dominated by the shareholder primacy oriented theories.Footnote 44 The reason for this assertion is not far-fetched. Even though fundamentally underlain by shareholder primacy theory, there are a number of principles and provisions in the UK Corporate Governance CodeFootnote 45 and Companies Act of 2006 that still suggests that corporate executives and managers should balance competing stakeholder interests in running companies.Footnote 46
When compared with the shareholder primacy model, the stakeholder model is without doubt more favourably disposed to stakeholder protection by enjoining corporate executives to behave responsibly and manage the company in the interests of not just the business investors but also all stakeholders. However, a major query regarding this model relates to its assumption that ranks shareholder interests and other stakeholder rights as equal. Further, apart from its failure to identify who will qualify as material and legitimate stakeholders of a business, this model also lags in the provision of a practicable paradigm with which corporate executives can actually or effectively balance the so-called equal interests of all stakeholders, in the best interest of the company.Footnote 47 So, it turns out that, while the stakeholder theory has attractions, especially normatively speaking, it is largely not practical and, while solving the problem of shareholder opportunism, it has led to a more serious problem of stakeholder opportunism.Footnote 48 The question then remains, even if directors and shareholders have agreed that there is a need to balance competing stakeholder interests, with what workable theory, regulatory and enforcement regime can this be achieved?
Many scholars have attempted to formulate some middle ground approaches that sit between the two dominant theories.Footnote 49 However, the theoretical and regulatory ambits of an alternative model called the responsible stakeholder model (RSM)Footnote 50 appear most useful for the purpose of this article. RSM rejects corporate law isolation from stakeholder protection, which is cardinal to the shareholder primacy theorists. Within this theory, corporate law (and regulators using corporate law and corporate governance) need not necessarily descend into the arena to prescribe specific internal corporate governance rules for businesses for safeguarding stakeholder interests; since one size never fits all, this writer submits that, under existing conditions, corporate law and policy makers may continue to struggle to recommend effective corporate governance principles (whether in codes or not) for stakeholder protection. This writer reiterates that such efforts in the past have encouraged (and will probably continue to encourage) CSR greenwashFootnote 51 and empty or half-hearted compliance with codes of corporate governance without any real value or safeguards for stakeholder interests. This article recommends RSM for effective stakeholder protection, as it assumes the need to enhance shareholder value (wealth creation for shareholders) but, conjunctively, ensures social efficiency through the employment of the principles of corporate law to advance the aggregate welfare of stakeholders. With RSM, the obligation to identify and balance the interests of relevant stakeholders in a manner suitable for the commercial focus of each company rests on that company itself, and is not necessarily imposed by regulators through corporate law. Examples of a few primary corporate stakeholders, such as employees, host communities and creditors, may be mentioned and RSM offers some broad guidelines that companies may use to identify members of their stakeholder group. While the business community would be able to work with having the latitude to determine its own stakeholders, the law safeguards stakeholders by ensuring that, whenever any qualified stakeholder alleges violation of its legitimate interest in the company, both primary and secondary corporate law must provide an avenue for that stakeholder to seek redress and be remedied. RSM prescribes a presumptive duty on companies to develop appropriate and suitable stakeholder management and protection techniques. Companies within this framework must establish to regulators what suitable self-regulatory stakeholder mechanism they have employed towards balancing competing stakeholder interests. However, in the event of the failure of such internal self-regulatory frameworks, the law should presume that the business has acted irresponsibly and the company must painstakingly show it had taken verifiable steps to balance competing interests, despite which injury resulted to a victim stakeholder. In other words, because of the power, influence and impact that companies (small, large, domestic or multinational) generally have in society, corporate law and corporate governance must complement each other in providing a clear corresponding obligation on businesses to protect the interests of legitimate and qualified stakeholders. In addition, as a result of corporate power and influence in society, it appears appropriate to impose a rebuttable presumption of guilt whenever a stakeholder alleges a violation. It is left for businesses, in such circumstances, to demonstrate that they have acted responsibly. This article now explores this point and describes how useful this theory may be towards formulating stakeholder protection obligations and requirements in corporate law and corporate governance codes, and addressing CSR greenwash and mindless compliance in Nigeria and South Africa.
COMPARATIVE ANALYSIS OF STAKEHOLDER PROTECTION IN NIGERIA AND SOUTH AFRICA
This section of the article considers the protection of stakeholder interests at the levels of both primary (company law enactment) and subsidiary (regulations and codes) legislation. It also examines the features of techniques used for stakeholder protection in Nigeria and South Africa, together with their theoretical underpinnings, practical manifestations in laws and how effective or otherwise they have been within these business communities.
There are a few interesting primary corporate legislationFootnote 52 provisions in the two jurisdictions enjoining corporate executives to safeguard stakeholder interests. Nigeria has just updated its primary corporate legislation following President Muhammadu Buhari's assent to the Companies and Allied Matters Act, 2020 (CAMA 2020) on 7 August 2020. However, this article retains (with necessary clarifications) a few references to the repealed legislation, the Companies and Allied Matters Act 1990 as amended (CAMA), in order to demonstrate the extent of the legislative improvements (if any) recorded by the new enactment. Section 869 of CAMA 2020 repealed and replaced CAMA.
To begin with, section 279(3) and (4) of CAMAFootnote 53 enjoins directors to act in the best interests of the company as a whole, ensuring that the interests of the company's employees are also considered. These provisions include clear references to consideration of other interests apart from shareholder interests, showing that Nigerian primary corporate law takes cognizance of stakeholder protection. However, the value such corporate stakeholders may derive from these sections in relation to the safeguarding of their interests in the running of the company is another question. For instance, having sought to protect an important stakeholder group such as employees in section 279(3) and (4) of CAMA (now section 305(3) and (4) of CAMA 2020), the same legislation immediately weakens the efficacy of those provisions (at least from the perspective of any victim employee stakeholder) under sub-section (9)Footnote 54 to the effect that, even if the corporate executives do not behave responsibly in safeguarding stakeholder interests, only the “company” can complain. The problem is that these sections, in both CAMA and CAMA 2020, respectively constitute an adoption of the shareholder primacy-centric common law position of what is considered to be the “company” or the “interest of the company” in circumstances such as this. The “company” is assumed to mean members or shareholders as a whole, and the best interest or success of the company is taken to mean what is beneficial to the (economic) interests of the shareholders as a whole.Footnote 55
In relation to corporate disclosure in financial statements, Nigerian primary corporate legislation also focuses on the shareholder primacy model without provision for the consideration of important stakeholder interests (such as impacts on community life or the environment) as there are no provisions for non-financial corporate disclosures or (as it is more appropriately referred to in South Africa) integrated reporting on sustainability matters.Footnote 56
In summary, the Nigerian primary corporate legislative framework appears progressive following the introduction of CAMA 2020. The provisions of section 305(3) of CAMA 2020 (enjoining directors to have regard, in addition to the interests of the shareholders, to the impact of the company's operations on the environment in the community where the company operates) is commendable. However, the writer's holistic review of relevant provisions on the legal status or obligations of directors and corporate reporting obligations in Nigeria's corporate legislative framework shows that there will not be any substantive change from the previous status quo in stakeholder protection within the Nigerian corporate governance discourse. The effect of the provisions of section 305(3) and (4) of CAMA 2020 appears, at best, a transition from the crude adoption of the traditional shareholder primacy model to its modern variant, the ESV model adopted under section 172 of the UK Companies Act 2006 and critiqued earlier in this article.
South Africa's stakeholder protection provisions in its primary corporate legislation appear better than Nigeria's. However, the effectiveness of such provisions is also a different question. A few of these provisions are examined below. It is impressive that the South African 2008 Companies Act No 71 (SACA) is clear from the outset about its objectives to accommodate stakeholder interests in section 7(d) and (k).Footnote 57 Section 72(4)Footnote 58 also references a social and ethics committee, while section 76(3)(a) and (b)Footnote 59 enjoins directors to act in good faith and in the best interests of the company. While the legislative advancements in sections 7 and 72 of SACA are impressive, the fact that the stakeholder protection recognition provisions are respectively included in the preliminary sections and reduced to board committee considerations leaves a bitter taste, despite the writer's initial commendation. Further, despite the innovations in sections 7 and 72(4), the clear provisions of section 76(3)(b) enjoining corporate executives and directors to perform their functions in the best interests of the company suggest that the shareholder primacy theory still largely underpins the provisions.Footnote 60 In recognition of this development, Linda Muswaka concludes that, even though efforts have been made in SACA to ensure that the interests of other stakeholders (not just shareholders) are protected, it seems that the legislation fails to safeguard stakeholders’ rights effectively.Footnote 61
While Nigeria has concluded the process of amending CAMA with the introduction of CAMA 2020, South Africa is still involved in an on-going process of amending SACA through the 2018 Companies Amendment Bill. However, a review of this amendment shows no significant improvement in relation to its stakeholder protection provisions. For instance, amendment 14 essentially seeks to subject the social and ethics committee report to discussion by shareholders in general meeting, while amendment 15 (which seeks to amend section 72 of SACA) essentially mandates an externally assured social and ethics committee report but it is still subject to the company politics of shareholders in general meeting.
In the Introduction above, it was noted that corporate governance (as may be manifested in business codes) gives effect to legislated provisions and, as noted in the G20/OECD Principles of Corporate Governance, corporate governance codes should complement primary corporate legislation.Footnote 62 In both Nigeria and South Africa, provisions in the codes are targeted, among other aims, at stakeholder protection. While industry players in South Africa have one comprehensive code of corporate governance in the King IV Report,Footnote 63 the Nigerian business community appears not to be so fortunate.Footnote 64 Following complaints about the multiplicity of codes in Nigeria and recommendations for one comprehensive document,Footnote 65 the Financial Reporting Council of Nigeria (FRC of Nigeria)Footnote 66 issued the 2018 Nigerian Code of Corporate Governance (Nigerian Code),Footnote 67 replacing a controversial 2016 National Code of Corporate Governance.
These documents do indeed contain innovative principles and recommended practices towards stakeholder protection, which certainly deserve commendation. For instance, the provisions of principles 26, 27 and 28 of the Nigerian CodeFootnote 68 are impressive. Similarly, the South African King IV Report Footnote 69 includes interesting provisions regarding stakeholder protection. By way of brief history, the King II Report of 2002 replaced the King I Report of 1994 and was remarkable for acknowledging that there was a need to depart from the corporate governance single bottom line (shareholder primacy) approach to a triple bottom line, which embraces the economic, environmental and social aspects of a company's activities. The King III Report of 2009 is remarkable in refining the triple bottom line concept of King II and used the term “triple context”, which informed the introduction of the concept of integrated reporting, showing that the differentiating line between the so-called “financial” and “non-financial” matters of a company is becoming blurred and that the dimensions of the economy, society and the natural environment are intertwined and not separate.Footnote 70 The King IV Report was introduced in 2016 (effective 2017) and improved on King III. One of the King IV Report's key objectives is addressing mindless compliance with corporate disclosure requirements in corporate governance codes. Unlike the Nigerian Code with its tone of mandatory compliance,Footnote 71 the King IV Report constitutes a set of voluntary principles and practices to address mindless compliance. The phrase “stakeholder-inclusive approach” appears thematic in the King IV Report and informed its key provisions on stakeholder protection.Footnote 72
While it is obvious that both jurisdictions have corporate disclosure provisions in their respective codes of corporate governance regarding stakeholder protection and embedding sustainable business practices, two basic questions appear pertinent. First, what are the primary legislation disclosure provisions that these codes are complementing, or giving effect to? Secondly, what workable recommendations have been provided to corporate executives to consider and safeguard qualified, material and legitimate stakeholder interests?
Analysis at the beginning of this section showed that stakeholder protection provisions in the corporate law regimes of these countries can be described as either minimal (as corporate law provisions are shareholder-primacy centric and isolated from stakeholder protection, as in Nigeria) or inadequateFootnote 73 (as in the case of South Africa, where the stakeholder-inclusive approach appears enshrined but, upon scrutiny, is essentially reduced to boardroom politicsFootnote 74 and subjected to shareholders’ consideration and manipulation).
Notwithstanding that there are policy advancements in the two jurisdictions in relation to integrated corporate reporting requirements, this article nonetheless submits that the corporate governance codes in these two jurisdictions are defective:Footnote 75 there are no clear provisions in the primary corporate law regimes of these countries that demonstrate clear adoption of the stakeholder theory or any of its modern variants mentioned above. This writer submits that the impressive and innovative policies of the stakeholder-inclusive approach and underpinning integrated disclosures in South Africa, and the Nigerian environment, social and governance sustainability disclosure requirements have no strong legislative foundation;Footnote 76 the affected codes could be said to have followed different trajectories adopting a stakeholder-oriented approach, compared to the primary corporate laws (which are still shareholder primacy centric), instead of complementing them. The defects in these codes seem accentuated by the legal position in both Nigeria and South Africa that provisions of subsidiary legislation dealing with the same material as provisions of primary legislation cannot amend the provisions in the primary enactments.Footnote 77
In relation to the questions regarding a workable stakeholder management system for effective stakeholder protection, it is the writer's view that these policy innovations in the codes may neverFootnote 78 offer any real protection to stakeholders, as cases of CSR greenwash and faux box-ticking integrated reporting will only continue.Footnote 79 This is largely because, despite these codes, qualified, material and legitimate stakeholders will still rely on the company itself (acting through its directors, who with share option schemes are now also shareholders) to protect their interests. Besides, a “company” under the two shareholder primacy-centric corporate law systems still means the shareholders as a whole and as principals of the corporate executives and directors.
It is interesting to note that the King IV Report attempts to extend the meaning of “company” to other constituents, stating that “the company is represented by several interests and these include the interests of shareholders, employees, consumers, the community and the environment”.Footnote 80
It is also interesting to note that proponents of creativeFootnote 81 thinking (such as that noted above within the South African stakeholder protection regime) have also sought to rely on inferences or obiter judgments made by judges in cases such as Minister of Water Affairs and Forestry v Stilfontein,Footnote 82 De Villiers v BOE Bank Ltd Footnote 83 and Mthimunye-Bakoro v Petroleum Oil and Gas Corporation of South Africa (SOC) Limited Footnote 84 about the importance of corporate executives complying with corporate governance codes such as the King IV in running the company. Since it is also the duty of corporate executives to prevent financial loss and avoid unnecessary risks that could affect the company's bottom line or dissipate its assets,Footnote 85 it could also be creatively and expansively argued that the provisions of sections 283(1) of CAMA and 305(3) of CAMA 2020 allow directors to pursue CSR and protect stakeholder interests in avoiding unnecessary risk to the company's assets. However, while this may be considered impressive, to a judge and / or a regulator this is nothing but conjecture. Without a clear legislative prescription adopting a stakeholder oriented theory (such as the RSM suggested above), it will be difficult to convince any judge in either jurisdiction that corporate executives have a legal duty actually to safeguard stakeholder interests; the creative arguments set out above will therefore continue to offer no real safeguard for the interests of stakeholders under the present framework in these jurisdictions.
Section 166(2) of the 2013 Indian Companies Act is useful in emphasising this point. In acting in the best interest of the company, it mandates directors to consider employees, shareholders, the community and environmental protection. This is a clear legislative expansion of the directors’ duty beyond considering shareholders’ interests, for the benefit of the mentioned stakeholders, employees, host community and environment. It is unlike section 172 of the UK Companies Act, which says that directors should have regard for stakeholders. The Indian provision leaves no doubt that the Indian primary corporate legislation is not shareholder primacy oriented. However, as impressive as section 166(2) appears, it is not without its shortcomings. Having mentioned a few stakeholders in these sections, what becomes of the rights of other qualified, material and legitimate stakeholders who are not mentioned? Again, while Indian corporate law has also elevated CSR discourse and stakeholder protection to the level of the board of directors,Footnote 86 apart from similar criticisms against the South African social and ethics committee framework noted above,Footnote 87 the conception of corporate responsibility as largely constituting corporate charity and community development projects in India leaves much to be desired.
Notwithstanding this criticism of the Indian stakeholder protection framework, Nigeria and South Africa may nonetheless draw a few lessons. This article submits that what is missing and should be incorporated in the ongoing corporate law amendment processes in Nigeria and South Africa is a specific duty on the company itself (not on corporate executives or directors, as in India) to ensure qualified, material and legitimate stakeholder interests are properly considered and balanced in determining what is in the company's best interests. This would give impetus to the environmental, social and governance reporting under principle 28 of the Nigerian Code and the stakeholder-inclusive integrated reporting under King IV. The activities of the social and ethics committee would also be enhanced in providing real value to stakeholders and ensuring more mindful compliance by corporate executives with stakeholder protection requirements.
While aligning with Irene-Marie Esser's view that it would have been better if the wording of section 76(3)(b) of SACA had been clearer, as the current wording may create the impression that shareholder primacy is still preferred in the South African corporate law system,Footnote 88 this article departs from the mainstream notion that she appears to adopt, suggesting that CSR principles and stakeholder protection are better provided for in other aspects of law, not essentially within corporate law.Footnote 89 This article submits that wholehearted adoption of the shareholder primacy theory, and the isolation of corporate law from providing an effective remedy for violations of stakeholder rights using the corporate form, have simply become untenable.Footnote 90 Even if there once was, there is simply no longer any unassailable reason why corporate law principles, theories and rules should only focus on creating a conducive environment for corporate executives to maximize profits for shareholders and not afford credible requirements for safeguarding all stakeholder rights. All aspects and areas of law (including environmental, human rights, international and corporate law) should be instrumental in moving society closer to something acceptable to the majority. Corroborating this is the submission that corporate law isolation or the claim that corporate law should only serve the interests of the shareholder and managerial elite is highly suspect, especially if we believe that the purpose of corporations is to serve society as a whole, rather than a small, wealthy minority.Footnote 91 This article has shown that the revolution away from shareholder primacy oriented provisions in corporate legislation (primacy and subsidiary) appears to have already begun. Section 305(3) of CAMA 2020, sections 11(a) and 50(f) of the FRC of Nigeria Act, and section 7(d) and (k) together with section 72(4) of SACA are promising provisions and could be built upon towards effective CSR and stakeholder protection. This article submits that any expansive or creative interpretation afforded to provisions such as those under sections 279(3) and 283(1) of CAMA (or section 305(3) of CAMA 2020) and sections 7(d) and (k), 72(4), 76(3)(b) and 218(2) of SACA, together with inferences from earlier cited cases, will not only stretch the limits of those provisions too far but also amount to precarious handling of such an important aspect of public welfare. Such arguments will only appear protective to stakeholder interests without any real benefits to any victim stakeholder. The real danger to stakeholder protection from this will therefore be that proliferation of this so-called creative expansive thinking may crowd out other suggestions, such as that made in this article for head-on, direct and clear changes to primary corporate legislation. They might end up being used to divert policy makers’ attention at a domestic and international level from taking steps such as those recommended in this article.
This article further submits that the primary corporate legislation in both Nigeria and South Africa (and maybe beyond) should be amended specifically to show that it is no longer shareholder primacy oriented or based on the ESV model. Within the framework of the alternative corporate law theory of RSM as described above, this article argues that a duty be imposed, not on corporate executives, but on the company itself to consider, manage and balance competing stakeholders’ interests as is considered to be in the best interests of the company. This obligation on the company therefore means that shareholders, as residual owners, will ensure wholehearted and mindful compliance with sustainability and integrated reporting and disclosure requirements, since they know that violation of the legitimate interests of any qualified stakeholder may be very costly to the company, and affect available profits for sharing or drastically dissipate corporate assets and be inimical to their interests as residual claimants. Such an amendment would also include a flexible definition of who may be considered to be qualified, material and legitimate corporate stakeholders (the definition of which will vary from one company to another) at different stages of corporate operations and activities. After such amendments, corporate governance codes in these jurisdictions will truly complement and give effect to the primary corporate legislation. Upon adoption of these recommendations, the business judgment rule with which corporate law has imposed a duty on corporate executives to promote the financial interests and assets of companies will be further expanded to accommodate directors’ wholehearted pursuit of CSR and stakeholder protection requirements in the best interests of the company. Further, in light of prevailing modern socio-economic, political and environmental realities, corporate law has come of age, justifiably to impose a duty on companies allowing their directors, guided by the business judgment rule, to act responsibly and exercise their discretion and balance constituents’ competing interests without imposing any specific one-size-fits-all measures for companies to adopt. Self-regulatory business conduct codes within the business communities and requirements, guidelines and recommendations in corporate governance codes will give effect to the primary corporate legislation for CSR and stakeholder protection. Within the framework of the advocated RSM, the legal duty on companies to protect stakeholders should promote the success of companies as a whole. Company activities and assets will be managed for the ultimate benefit of the shareholders, but only in the sense that they constitute the residual risk bearers or claimants. For such residual risk, shareholders will retain the privilege of appointing competent and responsible corporate executives and directors who shall ensure, while avoiding unnecessary risks to corporate assets, that the company's business is responsible. If such corporate executives, as appointed by shareholders, fail in this legal obligation, qualified and material stakeholders with legitimate interests will have real enforceable rights to seek redress with the regulators or the courts as either jurisdiction may choose.
CONCLUSION
This article has shown that the concept of CSR constitutes a potent corporate governance tool towards safeguarding stakeholder rights. It has also underscored the prevalence of the shareholder primacy theory in corporate Nigeria and how it has metamorphosed into the ESV model under section 305(3) of CAMA 2020. While the South African primary corporate law system may be initially considered improved when compared to Nigeria's, upon scrutiny however, its stakeholder-inclusive approach was found essentially to be hinged on the modern variant of the shareholder primacy model as contained in section 76(3)(b) of SACA. This article argued that references to stakeholder interests under section 7(d) and (k) of SACA or under section 279(4) of CAMA and section 305(4) of CAMA 2020 are insufficient to embed responsible corporate activities in these jurisdictions. The article has recommended that both jurisdictions should harden their existing soft law, largely self-regulatory and voluntary frameworks for stakeholder protection, which appear to promote CSR greenwash and mindless compliance with stakeholder protection requirements. It noted that real protection to stakeholders can only be afforded where the primary corporate legislation is aligned in philosophy, principle and provisions with the impressive sustainability and integrated reporting requirements contained in the respective subsidiary legislation (corporate governance codes) in these jurisdictions. This article has not concluded that formalized stakeholder meetings should be entrenched in primary corporate legislation to rival shareholder meetings. As conceived within the formulated RSM, that would essentially defeat the commercial focus of the company and may stifle investment growth in these jurisdictions. The proposal is to impose a duty on the company itself to consider, manage and balance competing stakeholder interests, which will expand the traditional meaning of “the best interest of the company” in primary corporate legislation. This will not distract companies or their corporate executives from their pure commercial focus, but only ensure that “real” protection is afforded to qualified, material and legitimate stakeholders and that corporate executives have “requisite regard” for the protection of stakeholder interests, if they want to remain competitive.
CONFLICTS OF INTEREST
None
