It is not satisfactory that the Hampel Report can only offer an account of directors’ duties which is confusing and fundamentally incoherent.
The conscientious director will turn to the Hampel Report for a clear statement by a group of distinguished industrialists of the nature of a director’s duties. His (or, less often, her) eye will alight on paragraph 3.2 which describes them: “The duties are owed to the company, meaning generally the shareholders collectively, both present and future, not the shareholders at a given point in time!”
One obvious problem with this assertion is that it ignores the most important difference between shareholders and other stakeholders in a business. It is easy enough to see how there might be a divergence between the interests of the current and future employees of a firm. Employing more people than the company needs, today at higher wages the firm needs to pay, might undermine its competitive position and reduce the prospects for future employment.
But this is not true as between current and future shareholders, because the only way future shareholders acquire that status is by purchasing their shares from current shareholders. If an action would benefit future shareholders, it would raise the price they were willing to pay for their shares, and hence also benefit current shareholders. Thus the operation of market mechanisms ensure that the interests of current and future shareholders are identical. This is one of the wonders of the capitalist system. Even if we are altogether careless of the welfare of future generations, we take their interests into account when we build things to sell to them.
The only way you can rescue Hampels’ claim is by suggesting that future shareholders do not know what is in their best interests. Although the actions of management truly raise the future value of the company, they do not increase its present value, because the market does not understand what management is doing. This might, of course, be true. But it means management prerogatives are unchallengeable. Managers are to act in the interests of future shareholders. Not only are they, by definition, unidentified and unidentifiable; they are also, by assumption, ignorant of what their interests are.
But let us suppose that Hampel is right, and that directors are obliged to balance the claims of current and future shareholders. At this point, they would seem to fall foul of the problem identified in paragraph 1.17, which is used to explain why managers could not be responsible to stakeholders other than shareholders: “…..to redefine the directors’ responsibilities in terms of the stakeholders would mean identifying the various stakeholder groups; and deciding the nature and extent of the directors’ responsibility to each. The result would be that the directors were not effectively accountable to anyone since there would be no clear yardstick for judging their performance.”
Now I am not sure why this assertion is correct. It is perfectly possible to be accountable to more than one person or group of people and indeed this is the normal state of affairs. Sir Ronald Hampel is accountable, I suggest, to his board, his Committee, his shareholders and his wife. I suspect that the paragraph does not say what the Committee intended it to say, and when they use the word ‘accountable’ they meant ‘have responsibility, or duty to’. These are not the same thing. The Metropolitan Police are accountable to the Home Secretary, but that does not mean that the only house they guard is Jack Straw’s; their responsibilities extend to all law-abiding citizens. And in assessing their performance, the Home Secretary should look, not just at whether they have kept burglars out of his residence, but at whether it is safe to wall the streets of London.
However, once you have made that distinction, then half the argument of the paragraph collapses. The fact that shareholders theoretically elect directors does not of itself mean that the only interests the directors should pursue are those of shareholders. The question of who appoints to an office is entirely separable from the question of what the office holder should do.
And the other half of the argument is pretty weak too. Just as it is possible to be accountable to more than one person or group of people, it is also possible to have responsibilities to more than one person. Sir Ronald Hampel has responsibilities to his board, his Committee, his shareholders and his wife, and although he is not accountable to his children he certainly has duties towards them. No doubt it is sometimes difficult to balance these responsibilities, but that is a problem that all of us face.
All of this may seem nit-picking and semantic. After all, the Hampel Committee consists of practising businessmen, not trained linguistic philosophers. But it is not satisfactory, or tolerable, that a group of leading industrialists, specifically charged with making recommendations on corporate governance, can only offer an account of directors’ duties which is confusing and fundamentally incoherent. That is why we ought to have – which we do not have today – a statute law that defines what directors’ duties are. That enables us to ask what such a law should say.
It should not say what the Hampel Committee seems to think, in paragraph 1.17, that it should say. Or perhaps paragraph 1.17 tells us what they think it does say, for it is not clear whether the ex cathedra statements they make about the purposes of corporations are prescriptive, or simply descriptive of what they think is the current state of the law. What the Hampel Committee seems to want to assert that companies have relationships with all their stakeholders, but responsibilities only to their shareholders.
The key point is not that firms which are run on that basis are unlikely to serve even their shareholders well. It is that business which denies that it has duties to its employees, its customers and to the community at large stands no chance at all of sustaining public acceptance in the long run, even if it were successful in narrow economic terms. If these are the values of business, then we do not want them in our government, or near our schools, our hospitals, or our water supply. The key message of post-Thatcherite Britain is that there are no rights which are not associated with obligations. It is a message which the Hampel Committee would do well to take on board in their final report.